-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cp6KwxPgxjefg/Hq84J9XL5LSzm2kGmFocOFz2+z3r0uWhuLrr/KC4HZqFYFcQjn ba5M8JqK3oPIEpvTKedXmA== 0000889812-96-001982.txt : 19961227 0000889812-96-001982.hdr.sgml : 19961227 ACCESSION NUMBER: 0000889812-96-001982 CONFORMED SUBMISSION TYPE: 424B5 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19961224 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANTA MORTGAGE LOAN TRUST 1996-4 CENTRAL INDEX KEY: 0001028373 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: NY FILING VALUES: FORM TYPE: 424B5 SEC ACT: 1933 Act SEC FILE NUMBER: 033-99510-05 FILM NUMBER: 96686075 BUSINESS ADDRESS: STREET 1: ADVANTA MORTGAGE CONDUIT SERVICES, INC. STREET 2: 16875 WEST BERNARDO DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92127 BUSINESS PHONE: 2122598341 MAIL ADDRESS: STREET 1: ADVANTA MORTGAGE CONDUIT SERVICES INC STREET 2: 16875 WEST BERNARDO DRIVE CITY: SAN DIEGO STATE: CA ZIP: 92127 424B5 1 PROSPECTUS SUPPLEMENT PROSPECTUS SUPPLEMENT (To Prospectus Dated September 6, 1996) $330,000,000 (Approximate) Advanta Mortgage Loan Trust 1996-4 $210,000,000 Class A-1 Group I Certificates $120,000,000 Class A-2 Group II Certificates Mortgage Loan Asset-Backed Certificates, Series 1996-4 Advanta Mortgage Conduit Services, Inc. Sponsor of the Trust Advanta Mortgage Corp. USA Master Servicer The Mortgage Loan Asset-Backed Certificates, Series 1996-4 (the "Certificates") offered hereby will consist of two classes of variable rate Class A Certificates, the Class A-1 Group I Certificates (the "Class A-1 Certificates") and the Class A-2 Group II Certificates (the "Class A-2 Certificates" together with the Class A-1 Certificates, the "Class A Certificates" or the "Offered Certificates"). The Certificates will also include one or more classes of subordinate certificates (the "Class R Certificates"). Only the Offered Certificates are offered hereby. The Certificates will represent undivided ownership interests in one of two groups of closed-end mortgage loans (the "Mortgage Loans") held by the Advanta Mortgage Loan Trust 1996-4 (the "Trust"). The Trust will be created pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing Agreement") among Advanta Mortgage Conduit Services, Inc., in its capacity as the sponsor (the "Sponsor") of the Trust, Advanta Mortgage Corp. USA, in its capacity as master servicer (the "Master Servicer") of the Mortgage Loans and Bankers Trust Company of California, N.A., as trustee (the "Trustee"). On or prior to the Closing Date the Sponsor will acquire the Mortgage Loans from the Originators, as described herein. The obligations of the Sponsor and of the Master Servicer with respect to the Certificates will be limited to their respective contractual obligations under the Pooling and Servicing Agreement. The assets of the Trust will include two groups (each, a "Mortgage Loan Group" or "Group", and together the "Mortgage Loan Pool") of Mortgage Loans secured by mortgages or deeds of trust (the "Mortgages") on one-to-four family residential properties (the "Mortgaged Properties") to be conveyed to the Trust on the Closing Date. The Class A-1 Certificates will represent undivided ownership interests in a sub-trust of Mortgage Loans having fixed rates of interest ("Group I"). All of the Group I Mortgage Loans have remaining terms to maturity of 30 years or less and are secured by Mortgages which may be either in a first or in a junior lien position. The Class A-2 Certificates will represent undivided ownership interests in a sub-trust of variable rate Mortgage Loans ("Group II") with a maximum remaining term to maturity of 30 years secured by Mortgages which may be either in a first or in a junior lien position. For a discussion of certain risk factors regarding an investment in the Offered Certificates, see "Risk Factors" on page S-18 herein and on page 13 in the accompanying Prospectus. (cover continued on next page) FGIC LOGO THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS ONLY IN THE TRUST CREATED BY THE POOLING AND SERVICING AGREEMENT AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF ADVANTA MORTGAGE CONDUIT SERVICES, INC., ADVANTA MORTGAGE CORP. USA, OR ANY ORIGINATOR. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The Offered Certificates will be offered by the Underwriters from time to time to the public in negotiated transactions or otherwise at varying prices to be determined at the time of the related sale. Proceeds to the Sponsor are anticipated to be approximately $329,122,500 from the sale of the Offered Certificates before deducting expenses payable by the Sponsor, estimated to be $500,000. The Underwriters have agreed to reimburse the Sponsor with respect to certain of such expenses. The Offered Certificates are offered subject to prior sale when, as, and if accepted by the Underwriters and subject to the approval of certain legal matters. It is expected that delivery of the Offered Certificates in book-entry form will be made on or about December 19, 1996 only through The Depository Trust Company, Euroclear and Cedel S.A. PRUDENTIAL SECURITIES INCORPORATED MORGAN STANLEY & CO. Incorporated SALOMON BROTHERS INC December 6, 1996 On or before the issuance of the Certificates, the Sponsor will obtain from Financial Guaranty Insurance Company (the "Certificate Insurer") a certificate guaranty insurance policy relating to the Offered Certificates (the "Certificate Insurance Policy"), in favor of the Trustee. The Offered Certificates will initially be issued in book-entry form. Persons acquiring beneficial ownership interests in such Offered Certificates ("Beneficial Owners") may elect to hold their interests through The Depository Trust Company ("DTC"), in the United States, or Centrale de Livraison de Valeurs Mobiliers, S.A. ("CEDEL") or the Euroclear System ("Euroclear"), in Europe. The Offered Certificates will be offered in Europe and the United States of America. Distributions of principal and interest payable on each Class of Offered Certificates will be made on the 25th day of each month or if the 25th day is not a business day, the first business day thereafter (each, a "Payment Date"), beginning January 27, 1997. An election will be made to treat certain assets of the Trust as one or more REMICs for federal income tax purposes. See "Certain Federal Income Tax Consequences" herein and in the Prospectus. Prior to their issuance there has been no market for the Offered Certificates nor can there be any assurance that one will develop, or if it does develop, that it will provide the Owners of the Offered Certificates with liquidity or will continue for the life of the Offered Certificates. Prudential Securities Incorporated, Morgan Stanley & Co. Incorporated, and Salomon Brothers Inc (the "Underwriters") intend, but are not obligated, to make a market in the Offered Certificates. Until 90 days from the date of this Prospectus Supplement, all dealers effecting transactions in the Offered Certificates, whether or not participating in this distribution, may be required to deliver a prospectus and a prospectus supplement. This is in addition to the obligation of dealers to deliver a prospectus and a prospectus supplement when acting as underwriters and with respect to their unsold allotments or subscriptions. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE OFFERED CERTIFICATES AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. AVAILABLE INFORMATION The Sponsor has filed a Registration Statement under the Securities Act of 1933, as amended (the "1933 Act"), with the Securities and Exchange Commission (the "Commission") on behalf of the Trust with respect to the Offered Certificates offered pursuant to the Prospectus dated September 6, 1996 and this Prospectus Supplement. For further information, reference is made to the Registration Statement and amendments thereof and to the exhibits thereto, which are available for inspection without charge at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and at The Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and amendments thereof and exhibits thereto may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. S-2 REPORTS TO THE CERTIFICATEHOLDERS So long as the Offered Certificates are in book-entry form, monthly and annual reports concerning the Certificates and the Trust will be sent by the Trustee to Cede & Co., as the nominee of DTC and as registered holder of the Offered Certificates pursuant to the Pooling and Servicing Agreement. DTC will supply such reports to Beneficial Owners in accordance with its procedures. See "Special Considerations," "Description of the Securities --Form of Securities" and " -- Reports to Securityholders" in the Prospectus. To the extent required by the Securities Exchange Act of 1934, as amended, the Trust will provide financial information to the Owners which has been examined and reported upon, with an opinion expressed by an independent public accountant; to the extent not so required, such financial information will be unaudited. The Sponsor has determined that the financial statements of no entity other than the Certificate Insurer are material to the offering made hereby. The Trust will be formed to own the Mortgage Loans, and to issue the Certificates. The Trust will have no assets or obligations prior to issuance of the Certificates and will engage in no activities other than those described herein. Accordingly, no financial statements with respect to the Trust are included in this Prospectus Supplement. The audited financial statements of the Certificate Insurer are set forth in Appendix A hereto, and the unaudited interim financial statements of the Certificate Insurer are set forth in Appendix B hereto. S-3 SUMMARY The following summary is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus Supplement and the accompanying Prospectus. Reference is made to the Index of Principal Defined Terms for the location in the Prospectus of the definitions of certain capitalized terms. Issuer ........................................ Advanta Mortgage Loan Trust 1996-4 Securities Offered............................... Class A-1 Group I Certificates (the "Class A-1 Certificates") and Class A-2 Group II Certificates (the "Class A-2 Certificates" together with the Class A-1 Certificates, the "Class A Certificates" or the "Offered Certificates"). Sponsor.......................................... Advanta Mortgage Conduit Services, Inc., a Delaware corporation. The Sponsor's principal executive offices are located at 16875 West Bernardo Drive, San Diego, California 92127, and its phone number is (619) 674-1800. Master Servicer.................................. Advanta Mortgage Corp. USA, a Delaware corporation. The Master Servicer's principal executive offices are located at 16875 West Bernardo Drive, San Diego, California 92127. Originators...................................... The Mortgage Loans to be acquired by the Trust from the Sponsor will be acquired by the Sponsor from Affiliated Originators or from one or more Unaffiliated Originators. Certain of the Mortgage Loans have been acquired by the Sponsor in Bulk Acquisitions. See "The Mortgage Loan Pool" herein. Cut-Off Date..................................... December 1, 1996. Closing Date..................................... December 19, 1996. The Certificates................................. The Mortgage Loan Asset-Backed Certificates, Series 1996-4 (the "Certificates") will consist of the Offered Certificates and one or more classes of subordinate certificates (the "Class R Certificates"). The Certificates will be issued pursuant to a pooling and servicing agreement (the "Pooling and Servicing Agreement") to be dated as of December 1, 1996 among the Master Servicer, the Sponsor and Bankers Trust Company of California, N.A., as Trustee (the "Trustee"). Only the Offered Certificates are offered hereby. The assets of the Trust will include two groups of closed-end Mortgage loans secured by mortgages on one-to-four family residential properties to be conveyed to the Trust on the Closing Date. The Class A-1 Certificates will represent undivided ownership interests in a sub-trust of Mortgage Loans having fixed rates of interest. All of the Group I Mortgage Loans have remaining terms to maturity of 30 years or less and are secured by Mortgages which may be either in a first or in a junior lien
S-4 position, together with certain other rights. The Class A-2 Certificates will represent undivided ownership interests in a sub-trust of variable rate Mortgage Loans with a maximum remaining term to maturity of 30 years secured by Mortgages which may be either in a first or in a junior position, together with certain other rights. The final scheduled Payment Date for the Offered Certificates is November 25, 2026 (the "Final Scheduled Payment Date"). It is expected that the actual final Payment Date for each class of Offered Certificates will occur significantly earlier than such scheduled Payment Dates; see "Prepayment and Yield Considerations." The Offered Certificates are issuable in original principal amounts of $1,000 and integral multiples thereof, except that one certificate for each Class of Offered Certificates may be issued in a lesser amount. The Certificate Insurer does not directly or indirectly guarantee any specified rate of prepayments; see "Special Considerations." The Mortgage Loans............................... The statistical information presented in this Prospectus Supplement concerning the pools of Mortgage Loans (such pools, the "Statistic Calculation Pools") does not reflect all of the Mortgage Loans which will be included on the Closing Date in the final pools. The Statistic Calculation Pools reflect the Mortgage Loans acquired by the Sponsor through the Cut- Off Date and the statistical information presented herein is based on the number and the principal balances of such Mortgage Loans as of the Cut-Off Date. The aggregate principal balance of the Group I Statistic Calculation Pool is $195,075,834.30 and of the Group II Statistic Calculation Pool is $113,090,141.89. The Sponsor expects that the actual pools as of the Closing Date will represent approximately $210,000,000 in Mortgage Loans in Group I and approximately $120,000,000 in Mortgage Loans in Group II. The additional Mortgage Loans to be included in the final pools will represent Mortgage Loans acquired or to be acquired by the Sponsor prior to the Closing Date. In addition, with respect to the Statistic Calculation Pools, as to which statistical information is presented herein, some amortization of the Mortgage Loans in such pools will occur prior to the Closing Date. In addition, certain loans included in the Statistic Calculation Pools may prepay in full or may be determined not to meet the eligibility requirements for the final pools and as a result may not be included in the final pools. As a result of the foregoing, the statistical distribution of such characteristics as of the Closing Date in the final Mortgage Loan pools will vary somewhat from the statistical distribution of such characteristics in the Statistic Calculation Pools as presented in this Prospectus Supplement, although such variance will not be material. In the event that the Sponsor does not, as of the Closing Date, have the
S-5 full amount of Mortgage Loans which the Sponsor expects to sell to the Trust on such date, (i.e., approximately $210,000,000 with respect to Group I and approximately $120,000,000 with respect to Group II) the Sponsor will reduce the size of the offering; the Sponsor does not expect that the original principal amount of any class will increase or decrease by more than 5% as a result of such non-delivery. Even if the full expected amount of Mortgage Loans is delivered, certain adjustments (plus or minus 5%) may occur between the class sizes. Unless otherwise noted, all statistical percentages in this Prospectus Supplement are measured by the aggregate principal balance of the related Statistic Calculation Pools. The Mortgage Loans will be predominantly home equity loans, i.e., loans used (x) to refinance an existing mortgage loan on more favorable terms, (y) to consolidate debt, or (z) to obtain cash proceeds by borrowing against the Mortgagor's equity in the related Mortgaged Property. The Mortgage Loans to be sold to the Trust by the Sponsor consisted, with respect to the Statistic Calculation Pools, of 4,622 Mortgages and the related Notes on one-to-four family residential properties, including investment properties (which may be condominiums, manufactured homes, townhouses or homes in one-to-four family residences), located in 49 states and the District of Columbia. The Mortgage Loans are secured by Mortgages of which 93.02% by principal balance are first mortgages or deeds of trust and 6.98% are secured by junior mortgages or deeds of trust. The Mortgage Loans are all closed-end mortgage loans in that the mortgagee is not required to make future advances thereunder. 99.99% of the Mortgage Loans are Actuarial Loans or Date of Payment Loans, as defined herein under "The Mortgage Loan Pool -- Interest Payments on the Mortgage Loans." None of the Mortgage Loans are insured by primary mortgage insurance policies. There is no pool insurance insuring any of the Mortgage Loans; however, certain distributions due to the Owners of the Offered Certificates are insured by the Certificate Insurer pursuant to the Certificate Insurance Policy. See "Credit Enhancement" in this Summary and "The Certificate Insurance Policy" and "The Certificate Insurer" herein. The Mortgage Loans are not guaranteed by the Sponsor, the Master Servicer, any Originator or any of their respective affiliates. The Mortgage Loans are required to be serviced by the Master Servicer in accordance with the terms of the Pooling and Servicing Agreement and with reasonable care, using that degree of skill and attention that the Master Servicer exercises with respect to comparable mortgage loans that it services for itself and others, which shall constitute accepted servicing practices. See "Description of the Securities --Collection and Other Servicing Procedures" in the Prospectus.
S-6 Original Class A-1 Certifi- cate Principal Balance......................... $210,000,000. Original Class A-2 Certifi- cate Principal Balance......................... $120,000,000. Class A-1 Pass-Through Rate...................... The Class A-1 Pass-Through Rate will be equal to the lesser of (i)(a) with respect to any Payment Date which occurs on or prior to the Step-Up Payment Date, the London interbank offering rate for one-month United States dollar deposits ("LIBOR") (calculated as described under "Description of the Certificates -- Calculation of LIBOR") plus 0.295% per annum or (b) with respect to any Payment Date thereafter, LIBOR plus 0.59% per annum and (ii) the Class A-1 Available Funds Pass-Through Rate for such Payment Date. The excess, if any, of (x) the interest due on the Class A-1 Certificates on any Payment Date calculated at the Class A-1 Formula Pass- Through Rate over (y) the interest due on the Class A-1 Certificates calculated at the Class A-1 Available Funds Pass- Through Rate is the "Class A-1 Supplemental Interest Amount" for such Payment Date. If, on any Payment Date, there is a Class A-1 Supplemental Interest Amount calculated for any Payment Date, the Owners of certain of the Class R Certificates have agreed to pay such amount. If the full amount of the Class A-1 Supplemental Interest Amount is not paid on a Payment Date, then the amount not paid will accrue interest at the Class A-1 Formula Pass-Through Rate until such amount is paid on subsequent Payment Dates. Class A-2 Pass-Through Rate...................... The Class A-2 Pass-Through Rate will be equal to the lesser of (i)(a) with respect to any Payment Date which occurs on or prior to the Step-Up Payment Date, LIBOR plus 0.22% per annum or (b) with respect to any Payment Date thereafter, LIBOR plus 0.44% per annum and (ii) the Class A-2 Available Funds Pass-Through Rate for such Payment Date. The excess, if any of (x) the interest due on the Class A-2 Certificates on any Payment Date calculated at the Class A-2 Formula Pass- Through Rate over (y) the interest due on the Class A-2 Certificates calculated at the Class A-2 Available Funds Pass- Through Rate is the "Class A-2 Supplemental Interest Amount" for such Payment Date. The sum of the Class A-1 Supplemental Interest Amount and the Class A-2 Supplemental Interest Amount is the "Supplemental Interest Amount." Net Monthly Excess Cashflow which may be released with respect to one Mortgage Loan Group is not required to be applied to the payment of a Supplemental Interest Amount with respect to the other Mortgage Loan Group. If, on any Payment Date, there is a Class A-2 Supplemental Interest Amount calculated for any Payment Date, the Owners of certain of the Class R Certificates have agreed to pay such amount. If the full amount of the Class A-2 Supplemental
S-7 Interest Amount is not paid on a Payment Date, then the amount not paid will accrue interest at the Class A-2 Formula Pass-Through Rate until such amount is paid on subsequent Payment Dates. The Certificate Insurer does not guarantee the payment of, nor do the ratings assigned to the Class A-1 Certificates or the Class A-2 Certificates address the likelihood of the payment of, any Supplemental Interest Amount. The Pooling and Servicing Agreement defines the "Class A-1 Available Funds Pass-Through Rate," as of any Payment Date, to be an amount, expressed as a per annum rate, equal to (a)(i) the aggregate amount of interest due on all of the Mortgage Loans in Group I for the related Remittance Period minus (ii) the aggregate of the Servicing Fee and the Trustee's Fee and the premiums due to the Certificate Insurer, in each case relating to Group I, on such Payment Date and minus (iii) commencing on the Closing Date, an amount equal to 0.75% per annum times the aggregate Principal Balance of the Mortgage Loans in Group I as of the beginning of such related Remittance Period, divided by (b) the aggregate Principal Balance of the Mortgage Loans in Group I immediately prior to such Payment Date calculated on the basis of a 360 day year and the actual number of days elapsed. The Pooling and Servicing Agreement defines the "Class A-2 Available Funds Pass-Through Rate," as of any Payment Date, to be an amount, expressed as a per annum rate, equal to (a)(i) the aggregate amount of interest due on all of the Mortgage Loans in Group II for the related Remittance Period minus (ii) the aggregate of the Servicing Fee and the Trustee's Fee and the premium due to the Certificate Insurer, in each case relating to Group II, on such Payment Date and minus (iii) commencing on the ninth Payment Date following the Closing Date, an amount equal to 0.75% per annum times the aggregate Principal Balance of the Mortgage Loans in Group II as of the beginning of such related Remittance Period, divided by (b) the aggregate Principal Balance of the Mortgage Loans in Group II immediately prior to such Payment Date calculated on the basis of a 360 day year and the actual number of days elapsed. The "Step-Up Payment Date" is the second Payment Date which follows the Clean-up Call Date. The "Class A-1 Formula Pass-Through Rate" for a Payment Date is the rate described in clause (i) of the definition of "Class A-1 Pass-Through Rate" on such Payment Date. The "Class A-2 Formula Pass-Through Rate" for a Payment Date is the rate described in clause (i) of the definition of "Class A-2 Pass-Through Rate" on such Payment Date.
S-8 Distributions, Generally......................... Distributions on the Certificates are required to be made on the twenty-fifth day of each calendar month, or if such day is not a business day, the next succeeding business day (each, a "Payment Date") commencing on January 27, 1997, to the Owners of record (see "Description of the Certificates -- General"). The Owners of record shall be such Owners of the Certificates as of the last day of the calendar month immediately preceding the calendar month in which such Payment Date occurs, whether or not such day is a business day (each a "Record Date") in an amount equal to the product of such Owner's Percentage Interest and the amount distributed in respect of such Owner's class of such Certificates on such Payment Date. Distributions of Interest........................ For each Payment Date, the interest due with respect to the Class A-1 Certificates will be the interest which has accrued thereon at the Class A-1 Pass-Through Rate from the preceding Payment Date (or from December 19, 1996 in the case of the first Payment Date) to and including the day prior to the current Payment Date; the interest due with respect to the Class A-2 Certificates will be the interest which has accrued thereon at the Class A-2 Pass-Through Rate from the preceding Payment Date (or from December 19, 1996 in the case of the first Payment Date) to and including the day prior to the current Payment Date. Each period referred to in the prior sentence relating to the accrual of interest is the "Accrual Period" for the related class of Offered Certificates. The Pooling and Servicing Agreement defines the "Class A Interest Distribution Amount" for each class of Offered Certificates with respect to each Payment Date as being the aggregate amount of interest accrued on such class of Offered Certificates during the related Accrual Period at the related Pass-Through Rate, together with any unpaid interest shortfalls relating to such class from prior periods; the "Class A Interest Distribution Amount" for the Offered Certificates does not include the amount, if any, of the Supplemental Interest Amount. The Class A-1 Interest Distribution Amount is sometimes referred to as the "Group I Interest Distribution Amount"; the Class A-2 Interest Distribution Amount is sometimes referred to as the "Group II Interest Distribution Amount" and either the Group I Interest Distribution Amount or the Group II Interest Distribution Amount is sometimes referred to as the related "Group Interest Distribution Amount." All calculations of interest on the Class A-1 Certificates and the Class A-2 Certificates will be made on the basis of the actual number of days elapsed in the related Accrual Period, divided by 360. Distribution of Principal........................ The Owners of each class of Offered Certificates will be entitled to receive certain monthly distributions of principal on each
S-9 Payment Date which generally reflect collections of principal during the prior calendar month. On each Payment Date, the Class A-1 Certificates will be entitled to receive 100% of the Class A Principal Distribution Amount (as hereinafter defined) with respect to Group I. On each Payment Date, the Class A-2 Certificates will be entitled to receive 100% of the Class A Principal Distribution Amount with respect to Group II. Any loss on a Liquidated Mortgage Loan (i.e., a Realized Loss) may or may not be distributed to the Owners of the Class of Offered Certificates on the Payment Date which immediately follows the event of loss. However, the Owners of the Offered Certificates are entitled to receive ultimate recovery of any Realized Losses which occur in the Mortgage Loan Pool. The subordination provisions of the Trust result in a limited acceleration of principal payments to the Owners of each class of Offered Certificates. Such subordination provisions are more fully described under "Description of the Certificates -- Overcollateralization Provisions" and "Description of the Certificates -- Crosscollateralization Provisions." Such subordination provisions also have an effect on the weighted average lives of the Offered Certificates; see "Prepayment and Yield Considerations." In addition, the following discussion makes use of a number of defined terms which are defined under "Description of the Certificates -- Overcollateralization Provisions" and "Description of the Certificates -- Cross- collateralization Provisions." The Pooling and Servicing Agreement defines the "Class A Principal Distribution Amount" for each Mortgage Loan Group with respect to each Payment Date as being the lesser of: (a) the Available Funds for the related Mortgage Loan Group, plus any related Insured Payment and minus the related Group Interest Distribution Amount, and (b) (i)the sum, without duplication of: (A) the amount of any Subordination Deficit due from any prior period with respect to the related Mortgage Loan Group; (B) the principal actually collected by the Master Servicer with respect to the Mortgage Loans in the related Mortgage Loan Group during the related Remittance Period; (C) the Loan Balance of each Mortgage Loan in the related Mortgage Loan Group that either was repurchased by the Sponsor or an Originator or purchased by the Master Servicer or any
S-10 Sub-Servicer on the related Remittance Date, to the extent such Loan Balance is actually received by the Trustee; (D) any Substitution Amounts delivered by the Sponsor or an Originator on the related Remittance Date in connection with a substitution of a Mortgage Loan in the related Mortgage Loan Group, to the extent such Substitution Amounts are actually received by the Trustee; (E) all Net Liquidation Proceeds actually collected by the Master Servicer with respect to the Mortgage Loans in the related Mortgage Loan Group during the related Remittance Period (to the extent such Net Liquidation Proceeds relate to principal); (F) the amount of any Subordination Deficit with respect to the related Mortgage Loan Group for such Payment Date; (G) the proceeds received by the Trustee from any termination of the related Mortgage Loan Group (to the extent such proceeds relate to principal); (H) the amount of any Subordination Increase Amount with respect to the related Mortgage Loan Group for such Payment Date to the extent of any Net Monthly Excess Cashflow available for such purpose; minus (ii) the amount of any Subordination Reduction Amount with respect to the related Mortgage Loan Group for such Payment Date. In no event will the Class A Principal Distribution Amount for any class of Offered Certificates and Payment Date (x) be less than zero or (y) be greater than the then-outstanding Class A Certificate Principal Balance of the related class of Offered Certificates. With respect to any class of Offered Certificates and Payment Date, the sum of the related Class A Interest Distribution Amount and the related Class A Principal Distribution Amount with respect to such Payment Date is the "Class A Formula Distribution Amount" for such class and Payment Date. With respect to the Class A-1 Certificates and any Payment Date, the sum of the Group I Interest Distribution Amount and the amount of the Group I Subordination Deficit, if any, is the
S-11 "Group I Insured Distribution Amount." With respect to the Class A-2 Certificates and any Payment Date, the sum of the Group II Interest Distribution Amount and the Group II Subordination Deficit, if any, is the "Group II Insured Distribution Amount." The Group I Insured Distribution Amount and the Group II Insured Distribution Amount are sometimes referred to as the "Insured Distribution Amount". The actual amount distributed with respect to each class of Offered Certificates on any Payment Date is the "Class A Distribution Amount" for such class and Payment Date. A "Liquidated Mortgage Loan" is, in general, a defaulted Mortgage Loan as to which the Master Servicer has determined that all amounts that it expects to recover on such Mortgage Loan have been recovered (exclusive of any possibility of a deficiency judgment). Any loss on a Liquidated Mortgage Loan (i.e., a Realized Loss) may or may not be recovered by the Owners of the related class of Offered Certificates on the Payment Date which immediately follows the event of loss. However, the Owners of the Offered Certificates are entitled to receive ultimate recovery of any Realized Losses which occur in the related Mortgage Loan Group, receipt of which will be no later than the Payment Date occurring after such Realized Loss creates a Subordination Deficit (as described below). Such ultimate payment will be in the form of an Insured Payment if not covered through Net Monthly Excess Spread in the related Mortgage Loan Group or the other Mortgage Loan Group. A payment by the Certificate Insurer under the Certificate Insurance Policy is referred to herein as an "Insured Payment." Insured Payments do not include Realized Losses until such time as such aggregate, cumulative Realized Losses have created a Subordination Deficit, nor do Insured Payments cover the Master Servicer's failure to make Delinquency Advances until such time as the aggregate, cumulative amount of such unpaid Delinquency Advances, when added to Realized Losses, have created a Subordination Deficit. A "Subordination Deficit" with respect to a Mortgage Loan Group and Payment Date is the amount, if any, by which (x) the aggregate Class A Certificate Principal Balance of the related Group of Offered Certificates, after taking into account all distributions to be made on such Payment Date (except for any payment to be made as to principal from the proceeds of the Certificate Insurance Policy), exceeds (y) the aggregate principal balance of the Mortgage Loans in the related Mortgage Loan Group as of the close of business on the last day of the preceding Remittance Period. The Pooling and Servicing Agreement requires that the Class A-1 Certificate Principal Balance and the Class A-2 Certificate
S-12 Principal Balance, if not previously reduced to zero, be reduced to zero on the Final Scheduled Payment Date. Credit Enhancement............................... The Credit Enhancement provided for the benefit of the Owners of the Offered Certificates consists of (x) the over- collateralization and crosscollateralization mechanics which utilize the internal cash flows of the Trust and (y) the Certificate Insurance Policy. Overcollateralization and Crosscollateralization. The subordination provisions of the Trust result in a limited acceleration of the Offered Certificates relative to the amortization of the Mortgage Loans in the related Group in the early months of the transaction. The accelerated amortization is achieved by the application of certain excess interest to the payment of Offered Certificates' principal. This acceleration feature creates, with respect to each Mortgage Loan Group, overcollateralization which results from the excess of the aggregate principal balances of the Mortgage Loans in the related Mortgage Loan Group over the related aggregate Class A Certificate Principal Balance. Once the required level of overcollateralization is reached, and subject to the provisions described in the next paragraph, the acceleration feature will cease, unless necessary to maintain the required level of overcollateralization. Subject to certain floors, caps and triggers, the required level of overcollateralization with respect to a Mortgage Loan Group may increase or decrease over time. An increase would result in a temporary period of accelerated amortization of the related Offered Certificates to increase the actual level of over- collateralization to its required level; a decrease would result in a temporary period of decelerated amortization to reduce the actual level of overcollateralization to its required level. In addition to the foregoing, the Pooling and Servicing Agreement provides that such excess interest, together with certain other excess amounts, generated by one Mortgage Loan Group may be used to fund shortfalls in Available Funds due to losses in the other Mortgage Loan Group, subject to certain prior requirements of such Mortgage Loan Group. See "Description of the Certificates -- Overcollateralization Provisions" and "Description of the Certificates -- Crosscol- lateralization Provisions." The Certificate Insurance Policy. The Sponsor will obtain a certificate insurance policy (the "Certificate Insurance Policy"), with respect to the Offered Certificates, which is noncancelable, in favor of the Trustee on
S-13 behalf of the Owners of the Offered Certificates. On each Payment Date, the Certificate Insurer will be required to make available to the Trustee the amount, if any, by which the Group I Insured Distribution Amount or Group II Insured Distribution Amount exceeds the Group I Available Funds or the Group II Available Funds, respectively, (after deducting the amount necessary to pay the related premium amount to the Certificate Insurer, the Trustee's Fees and certain fees due to the Master Servicer) as of such Payment Date. The Certificate Insurance Policy does not guarantee to owners of the Offered Certificates any specified rate of Prepayments. See "The Certificate Insurance Policy" and "The Certificate Insurer" herein and "Description of Credit Enhancement" in the Prospectus. Certificate Insurer.............................. Financial Guaranty Insurance Company. Delinquency Advances and Compensating Interest...................................... The Master Servicer will be obligated to make Delinquency Advances to the extent that such Delinquency Advances, in the Master Servicer's reasonable judgment, are reasonably recoverable from the related Mortgage Loan. Delinquency Advances are recoverable from (i) future collections on the Mortgage Loan which gave rise to the Delinquency Advance, (ii) Liquidation Proceeds for such Mortgage Loan and (iii) from certain excess cash flows not applied to any other purpose. "Delinquency Advances" are amounts deposited in the Principal and Interest Account by the Master Servicer equal to the sum of the interest portions (net of the Servicing Fees and certain other administrative amounts, if any) due, but not collected with respect to delinquent Mortgage Loans during the related Remittance Period. The Master Servicer is only obligated to make a Delinquency Advance if it reasonably believes that such Delinquency Advance will ultimately be recoverable from the related Mortgage Loan. In addition, the Master Servicer will also be required to deposit Compensating Interest in the Principal and Interest Account with respect to any full Prepayment received on a Mortgage Loan during the related Remittance Period out of its own funds without any right of reimbursement therefor. "Compensating Interest" is an amount equal to the difference between (x) 30 days' interest at the Mortgage Loan's coupon rate on the Loan Balance as of the first day of the related Remittance Period and (y) to the extent not previously advanced, the interest paid by the Mortgagor with respect to the Mortgage Loan. The Master Servicer will not be required to pay Compensating Interest with respect to any Remittance Period in an amount in excess of the aggregate Servicing Fee received by the Master Servicer for such Remittance Period. Book-Entry Registration of
S-14 the Offered Certificates....................... The Offered Certificates will initially be issued in book-entry form. Persons acquiring beneficial ownership interests in such Offered Certificates ("Beneficial Owners") may elect to hold their interests through The Depository Trust Company ("DTC"), in the United States, or Centrale de Livraison de Valeurs Mobiliers, S.A. ("CEDEL") or the Euroclear System ("Euroclear"), in Europe. Transfers within DTC, CEDEL or Euroclear, as the case may be, will be in accordance with the usual rules and operating procedures of the relevant system. So long as the Offered Certificates are Book-Entry Certificates (as defined herein), such Offered Certificates will be evidenced by one or more Offered Certificates registered in the name of Cede & Co. ("Cede"), as the nominee of DTC, or in the name of one of the European Depositories. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and counterparties holding directly or indirectly through CEDEL or Euroclear, on the other, will be effected in DTC through Citibank N.A. ("Citibank") or Morgan Guaranty Trust Company of New York ("Morgan," and together with Citibank, the "European Depositaries"), the relevant depositories of CEDEL or Euroclear, respectively, and each a participating member of DTC. The Offered Certificates will initially be registered in the name of Cede. The interests of the Owners of such Offered Certificates will be represented by book-entries on the records of DTC and participating members thereof. No Beneficial Owner will be entitled to receive a definitive certificate representing such person's interest, except in the event that Definitive Certificates (as defined herein) are issued under the limited circumstances described herein. All references in this Prospectus Supplement to any Offered Certificates reflect the rights of Beneficial Owners only as such rights may be exercised through DTC and its participating organizations for so long as such Offered Certificates are held by DTC. See "Description of the Offered Certificates -- Book-Entry Registration of the Offered Certificates" herein, and Annex I to this Prospectus Supplement, and "Description of the Certificates -- Book-Entry Registration" in the Prospectus. Monthly Servicing Fee............................ Advanta Mortgage Corp. USA will retain a Servicing Fee equal to 0.50% per annum. Optional Termination............................. The Master Servicer, acting directly or through a permitted designee, will have the right to purchase from the Trust all the Mortgage Loans then held by the Trust at a price at least equal to par plus accrued interest net of the Servicing Fee and any amounts owed to the Master Servicer on any Remittance Date after the Remittance Period during which the outstanding aggregate Loan Balances of the Mortgage Loans in the Trust had declined to 10% or less of the aggregate principal balance of the Mortgage Loans as of the Closing Date. The first such Remittance Date on which such option may be exercised is the "Clean-up Call Date".
S-15 Ratings ........................................ It is a condition of the original issuance of the Offered Certificates that the Offered Certificates receive ratings of AAA by Standard & Poor's Ratings Group, a division of The McGraw Hill Companies ("Standard & Poor's"), and Aaa by Moody's Investors Service, Inc. ("Moody's"). A security rating is not a recommendation to buy, sell or hold securities, and may be subject to revision or withdrawal at any time by the assigning entity. The ratings issued by Standard & Poor's and Moody's on the payment of principal and interest do not cover the payment of the Supplemental Interest Amounts. See "Prepayment and Yield Considerations" and "Ratings" herein and "Yield Considerations" in the Prospectus. Federal Tax Aspects.............................. For federal income tax purposes, an election will be made to treat certain assets of the Trust as one or more REMICs. Each of the Class A Certificates and the related rights to receive Supplemental Interest Payments will be comprised of (i) a "regular interest" in a REMIC, which will be treated as a debt instrument of the Trust for federal income tax purposes and (ii) the right to receive Supplemental Interest Payments having the characteristics described herein. A class of Class R Certificates will be designated as the "residual interest" with respect to each REMIC election made by the Trust. See "Certain Federal Income Tax Consequences" herein and in the Prospectus. ERISA Considerations............................. As described under "ERISA Considerations" herein, the Offered Certificates may be purchased by employee benefit plans that are subject to ERISA, as amended, provided that certain conditions are satisfied. See "ERISA Considerations" herein and in the Prospectus. Legal Investment Considerations................................... Although upon their initial issuance all classes of the Offered Certificates are expected to be rated AAA by Standard & Poor's and Aaa by Moody's, no class of Offered Certificates will constitute "mortgage related securities" for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). Special Considerations........................... For a discussion of certain factors that should be considered by prospective investors in the Offered Certificates, see "Special Considerations" herein and in the Prospectus. Certain Legal Matters............................ Certain legal matters relating to the validity of the issuance of the Certificates will be passed upon by Dewey Ballantine, New York, New York.
S-16 RISK FACTORS Prospective investors in the Offered Certificates should consider the following factors (as well as the factors set forth under "Special Considerations" in the Prospectus) in connection with the purchase of the Offered Certificates. Risk of Higher Default Rates for Mortgage Loans with Balloon Payments. 20.98% of the Mortgage Loans in the Statistic Calculation Pools by aggregate principal balance are Balloon Loans. See "Special Consideration -- Risk of Losses Associated with Balloon Loans" in the Prospectus. Nature of Security. Since the Mortgage Loans are secured in certain cases by junior liens subordinate to the rights of the mortgagee or beneficiary under the related senior mortgage(s) or deed(s) of trust, the proceeds from any liquidation, insurance or condemnation proceedings will be available to satisfy the outstanding balance of such a junior Mortgage Loan only to the extent that the claims of such senior mortgagee(s) or beneficiary(ies) have been satisfied in full, including any related foreclosure costs. In addition, a junior mortgagee may not foreclose on the property securing a junior mortgage unless it forecloses subject to the senior mortgage(s), in which case it must either pay the entire amount due on the senior mortgage(s) to the senior mortgagee(s) at or prior to the foreclosure sale or undertake the obligation to make payments on the senior mortgage(s) in the event the mortgagor is in default thereunder. In servicing junior mortgages in its portfolio, it is generally the Master Servicer's practice to satisfy the senior mortgage(s) at or prior to the foreclosure sale. The Master Servicer may also advance funds to keep the senior mortgage(s) current until such time as the Master Servicer satisfies the senior mortgage(s). The Trust will have no source of funds (and may not be permitted under the REMIC provisions of the Code) to satisfy the senior mortgage(s) or make payments due to the senior mortgagee(s). The Master Servicer will be required to advance such amounts in accordance with the Pooling and Servicing Agreement. Information is provided under "The Mortgage Loan Pool -- General" with respect to the LTVs and the CLTVs of the Mortgage Loans in the Statistic Calculation Pools. As discussed in the Prospectus under "Special Considerations," the value of the Mortgaged Properties underlying such loans could be adversely affected by a number of factors. As a result, despite the amortization of the junior and senior mortgage loans on such Mortgaged Properties, there can be no assurance that the CLTVs of such loans, determined as of a date subsequent to the origination date, will be the same or lower than the CLTVs for such loans, determined as of the origination date. Even assuming that the Mortgaged Properties provided adequate security for the Mortgage Loans, substantial delay could be encountered in connection with the liquidation of defaulted Mortgage Loans and corresponding delays in the receipt of such proceeds by the Trust could occur. Further, the Master Servicer will be entitled to deduct from liquidation proceeds received in respect of a fully liquidated Mortgage Loan all expenses incurred in attempting to recover amounts due on such Mortgage Loan and not yet repaid, including payments to senior mortgagees, legal fees, real estate taxes, and maintenance and preservation expenses, thereby reducing collections available to the Trust. Liquidation expenses with respect to defaulted Mortgage Loans do not vary directly with the outstanding principal balance of the loan at the time of default. Therefore, assuming that a servicer took the same steps in realizing upon a defaulted mortgage loan having a small remaining principal balance as it would in the case of a defaulted mortgage loan having a larger principal balance, the amount realized after expenses of liquidation would be smaller as a percentage of the outstanding principal balance of the smaller mortgage loan than would be the case with a larger loan. Because the average outstanding principal balances of the Mortgage Loans are small relative to the size of the loans in a typical pool of purchase-money first mortgages, realizations net of liquidation expenses on defaulted Mortgage Loans may also be smaller as a percentage of the principal amount of the Mortgage Loans than would such net realizations in the case of a typical pool of purchase-money first mortgage loans. Investor-owned properties represent (based solely upon statements made by the borrowers at the time of origination of the related Mortgage Loan), as a percentage of the aggregate principal balance of the Mortgage Loans in the Statistic Calculation Pools, 9.04% of the Mortgage Loans. It is possible that the rate of delinquencies, foreclosures and losses on mortgage loans secured by non-owner occupied properties could be higher than for loans secured by the primary residence of the borrower. S-17 Effect of Mortgage Loan Yield on Class A-1 Pass-Through Rate and Class A-2 Pass-Through Rate. The Class A-1 Pass-Through Rate and Class A-2 Pass-Through Rate are based upon the value of an index (one-month LIBOR) which is different from the value of the indices applicable to the Mortgage Loans in Group I and Group II, as described under "The Mortgage Pool -- Group I -- Group II" (either as a result of the use of a different index, rate determination date, rate adjustment date or rate cap or floor). The Mortgage Loans in Group I and Group II either do not adjust (in the case of the Group I Mortgage Loans which have fixed rates of interest) or primarily adjust semi-annually or yearly (subject, with respect to certain Group II Mortgage Loans, to an initial fixed-rate period of either three or five years) based upon a six-month LIBOR index or a one year Constant Maturity Treasury Index ("CMT" and together with the LIBOR index, the "Indices") whereas the Class A-1 Pass-Through Rate and Class A-2 Pass-Through Rate adjust monthly based on a one-month LIBOR index and are limited by the Class A-1 Available Funds Pass-Through Rate and the Class A-2 Available Funds Pass-Through Rate, respectively (unless Supplemental Interest Amounts (the payment of which is not insured by the Certificate Insurer and the payment of which is not rated) are funded in full). Consequently, the actual Class A-1 Pass-Through Rate for such Payment Date may not equal the Class A-1 Formula Pass-Through Rate for such Payment Date and the actual Class A-2 Pass-Through Rate for such Payment Date may not equal the Class A-2 Formula Pass-Through Rate for such Payment Date. In particular, the interest rates on the Mortgage Loans in Group I do not adjust, and the interest rates on the Mortgage Loans in Group II adjust less frequently than monthly, with the result that the actual Class A-1 Pass-Through Rate may be lower than the Class A-1 Formula Pass-Through Rate and the actual Class A-2 Pass-Through Rate may be lower than the Class A-2 Formula Pass-Through Rate for extended periods in a rising interest rate environment. In addition, one-month LIBOR and the Indices applicable to the Group II Mortgage Loans may respond to different economic and market factors, and there is not necessarily any correlation between them. Thus, it is possible, for example, that one-month LIBOR may rise during periods in which one or more Indices are falling or that, even if both one-month LIBOR and Indices applicable to the Group II Mortgage Loans rise during the same period, one-month LIBOR may rise much more rapidly than such Indices. See "Class A-1 Pass-Through Rate" and "Class A-2 Pass-Through Rate" in the Summary to this Prospectus Supplement. THE PORTFOLIO OF MORTGAGE LOANS The Mortgage Loan Pool includes loans which were either originated directly by the Affiliated Originators or purchased by the Affiliated Originators from others on a loan-by-loan basis and in either case acquired by the Sponsor. The Sponsor also acquires loans from Unaffiliated Originators in acquisitions from Conduit Participants or in bulk acquisitions of loan portfolios. Such loans are originated by Unaffiliated Originators either directly or purchased by the Unaffiliated Originators from others on a loan-by-loan basis. The Originators which are affiliated with the Sponsor are Advanta Mortgage Corp. USA, Advanta National Bank USA, Advanta Mortgage Corp. Midatlantic, Advanta Mortgage Corp. Midatlantic II, Advanta Mortgage Corp. Midwest, Advanta Mortgage Corp. of New Jersey, Advanta Mortgage Corp. Northeast and Advanta Finance Corp. Unaffiliated Originator. MCA. The Sponsor acquired approximately 7.75% of the Mortgage Loans in the Statistic Calculation Pools from Mortgage Corporation of America, an Unaffiliated Originator (such mortgage loans, the "MCA Loans"). Mortgage Corporation of America is headquartered in Southfield, Michigan and is engaged in originating mortgage loans through retail and wholesale channels. The MCA Loans consist of 383 Mortgages representing an aggregate principal balance of $23,877,660.82 as of the Statistic Calculation Date. Approximately 90% (by aggregate principal balance as of the Statistic Calculation Date) of the MCA Loans are included in Group I and approximately 10% of the MCA Loans are included in Group II. The MCA Loans are related to properties located in fourteen states. Prior to its purchase of the MCA Loans, the Sponsor performed or caused to be performed an operational review of the origination and servicing practices of MCA. As of the Statistic Calculation Date, the weighted average CLTV of the MCA Loans was 75.99%; the weighted average Mortgage Rate was 11.61% per annum; the weighted average original term to stated maturity was 220 months; the weighted average remaining term to stated maturity was 219 months and all of the MCA Loans were secured by first mortgages. S-18 Bulk Acquisitions. Loans, other than the MCA Loans, representing 10.9% of the aggregate principal balance of Mortgage Loans in the Statistic Calculation Pools were purchased in Bulk Acquisitions by the Sponsor in 1996 and such loans were originated in accordance with the Sponsor's Bulk Guidelines. (See "Mortgage Loan Program - Underwriting Guidelines - Bulk Guidelines" in the Prospectus.) Generally, the Bulk Loans were re-underwritten by the Sponsor using the Sponsor's underwriting guidelines. In addition, the Sponsor applied its credit grading guidelines in reviewing the Bulk Loans. All of the loans acquired in these transactions were acquired "servicing released"; i.e., Advanta Mortgage Corp. USA acts as the Master Servicer. All of the Mortgage Loans so purchased or to be so purchased are hereinafter referred to as the "Bulk Loans." Delinquencies Owned and Managed Servicing Portfolio. The following tables set forth information relating to the delinquency, loan loss and foreclosure experience of the Master Servicer for its servicing portfolio, excluding certain loans serviced by the Master Servicer that were not originated or purchased and reunderwritten by the Sponsor or its Affiliated Originators (the "Owned and Managed Servicing Portfolio"), of fixed and variable rate mortgage loans as of September 30, 1996 and for each of the four prior years. The Owned and Managed Servicing Portfolio includes, but is not limited to, the Mortgage Loans acquired on or prior to September 30, 1996, which are contained in the Mortgage Loan Pool. In addition to the Owned and Managed Servicing Portfolio, the Master Servicer serviced, as of September 30, 1996, approximately 42,000 mortgage loans with an aggregate principal balance as of such date of approximately $2.1 billion; such loans were not originated by the Sponsor or its Affiliated Originators and are being serviced for third parties on a contract servicing basis (the "Third-Party Servicing Portfolio"). No loans in the Third-Party Servicing Portfolio are included in the tables set forth below. [Rest of page intentionally left blank] S-19 DELINQUENCY AND FORECLOSURE EXPERIENCE OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MORTGAGE LOANS
Nine Months Ended Year Ending December 31, ----------------------- --------------------------------------------------- September 30, 1996 1995 1994 ----------------------- -------------------------- ------------------------ Number Dollar Number Dollar Number Dollar of Amount of Amount of Amount Loans (000) Loans (000) Loans (000) --------- ------------ ------------ ------------- ---------- ------------- Portfolio 40,403 $2,334,295 32,592 $1,797,582 26,446 $1,346,100 Delinquency percentage(1) 30-59 days 2.05% 1.93% 2.67% 2.44% 2.01% 1.57% 60-89 days 0.57% 0.64% 0.72 0.71 0.57 0.45 90 days or more 1.52% 1.33% 1.69 1.23 1.85 1.51 Total 4.14% 3.90% 5.08% 4.38% 4.43% 3.53% Foreclosure rate(2) 1.30% 1.48% 1.29% 1.53% 1.35% 1.38% REO properties(3) 0.44% -- 0.52% -- 0.47% -- Number Dollar Number Dollar of Amount of Amount Loans (000) Loans (000) --------- ------------ ------------ ------------- Portfolio 25,460 $1,149,864 22,318 $908,541 Delinquency percentage(1) 30-59 days 2.43% 2.22% 2.71% 2.59% 60-89 days 0.77 0.63 0.64 0.64 90 days or more 2.19 2.12 1.52 1.69 Total 5.39% 4.97% 4.87% 4.92% Foreclosure rate(2) 1.32% 1.62% 2.13% 2.78% REO properties(3) 0.42% -- 0.35% --
- ---------------------- (1) The period of delinquency is based on the number of days payments are contractually past due. The delinquency statistics for the period exclude - loans in foreclosure. (2) "Foreclosure Rate" is the number of mortgage loans or the dollar amount of mortgage loans in foreclosure as a percentage of the total number of mortgage loans or the dollar amount of mortgage loans, as the case may be, as of the date indicated. (3) REO Properties (i.e., "real estate owned" properties -- properties relating to mortgages foreclosed or for which deeds in lieu of foreclosure have been accepted, and held by the Master Servicer pending disposition) percentages are calculated using the number of loans, not the dollar amount. LOAN LOSS EXPERIENCE OF THE MASTER SERVICER'S OWNED AND MANAGED SERVICING PORTFOLIO OF MORTGAGE LOANS*
Nine Months Ended Year Ending December 31, ----------------- ------------------------------------------------------------------- September 30, 1996 1995 1994 1993 1992 ------------------ ---------------- ---------------- --------------- ----------------- (Dollars in thousands) (Dollars in thousands) Average amount outstanding(1) $2,277,935 $1,540,238 $1,225,529 $1,049,447 $786,178 Gross losses(2) $10,741 $13,978 $20,886 $14,115 $6,069 Recoveries(3) $79 $148 $179 $123 $145 Net losses(4) $10,661 $13,830 $20,707 $13,992 $5,924 Net losses as a percentage of average amount outstanding 0.62%(5) 0.90% 1.69% 1.33% 0.75%
- -------------------- (1) "Average Amount Outstanding" during the period is the arithmetic average of the principal balances of the mortgage loans outstanding on the last -- business day of each month during the period. (2) "Gross Losses" are amounts which have been determined to be uncollectible relating to mortgage loans for each respective period. (3) "Recoveries" are recoveries from liquidation proceeds and deficiency judgments. (4) "Net Losses" represents "Gross Losses" minus "Recoveries". (5) Annualized S-20 The Master Servicer experienced an increase in the net loss rate on its Owned and Managed Portfolio during the period 1990 through 1994. It believes that such increase was due to four primary factors: the seasoning of its portfolio, economic conditions, a decline in property values in certain regions and the acceleration of charge-offs on loans in 1994. The net loss rates as a percentage of the average amount outstanding on its Owned and Managed Portfolio, excluding NIV loans, are 0.82%, 1.42%, 0.88% and 0.45% for the periods ending December 31, 1995, December 31, 1994, December 31, 1993 and December 31, 1992, respectively.* [Rest of page intentionally left blank] - -------- * Managed portfolio statistics restated to exclude interest advances on serviced portfolio to be consistent with presentation of owned portfolio. S-21 THE MORTGAGE LOAN POOL General The Mortgage Loans will be predominantly home equity loans, i.e., loans used (x) to refinance an existing mortgage loan on more favorable terms, (y) to consolidate debt, or (z) to obtain cash proceeds by borrowing against the Mortgagor's equity in the related Mortgaged Property. The Statistic Calculation Pools contained 4,622 Mortgage Loans to be sold by the Sponsor to the Trust evidenced by promissory notes (the "Notes") secured by Mortgages on the Mortgaged Properties, which are located in 49 states and the District of Columbia. The Mortgaged Properties securing the Mortgage Loans consist primarily of single-family residences (which may be detached, part of a two-to four-family dwelling, a condominium unit or a unit in a planned unit development). The Mortgaged Properties may be owner-occupied (which includes second and vacation homes) and non-owner occupied investment properties. Unless otherwise noted, all statistical percentages in this Prospectus Supplement are measured by the aggregate principal balance of the related Statistic Calculation Pool. The Mortgage Loans will be required to satisfy the following criteria as of the Cut-Off Date: have remaining terms to maturity of no greater than 30 years; will not be 30 or more days delinquent (except that certain Mortgage Loans, representing in the aggregate not in excess of 1.00% of the aggregate principal balance of all Mortgage Loans as of the Cut-Off Date, may be 30-59 days delinquent) and, with respect to fixed-rate Mortgage Loans, have a Mortgage Rate as of the Cut-Off Date of at least 7.50%. Neither the Sponsor nor the Master Servicer have reason to believe that the delinquency and loss experience of the Mortgage Loans will differ in any material respect from that of the Master Servicer's total servicing portfolio, although there can be no assurance that this will be the case. 4.00% of the Mortgage Loans (as a percentage of the aggregate principal balance of all Mortgage Loans contained in the Statistic Calculation Pools) are "simple interest" or "date of payment" loans, 0.01% are "rule of 78" loans, and the remainder are "actuarial" or "pre-computed" loans. 93.02% of the Mortgage Loans are secured by first lien mortgages on the related Mortgaged Properties and 6.98% of the Mortgage Loans are secured by junior liens on the related Mortgaged Properties. Each Mortgage Loan in the Trust will be assigned to one of two mortgage loan groups ("Group I" and "Group II", respectively, and each a "Mortgage Loan Group"). The Mortgage Loans contained in Group I will be secured by a Mortgage having either a first or junior lien position with respect to the related Mortgaged Property and will have a maximum remaining term to maturity of 30 years. The Mortgage Loans contained in Group II will be secured by a Mortgage having either a first or a junior lien position with respect to the related Mortgaged Property and will have a maximum remaining term to maturity of 30 years. The Class A-1 Certificates represent undivided ownership interests in all Mortgage Loans contained or to be contained in Group I and the Class A-2 Certificates represent undivided ownership interests in all Mortgage Loans contained or to be contained in Group II. The CLTVs and LTVs described herein were calculated based upon the appraised values of the related Mortgaged Properties at the time of origination (the "Appraised Values"). In general, for purchase money loans, the CLTVs and LTVs were calculated using the lower of the purchase price or appraised values of the related Mortgaged Properties at the time of origination. No assurance can be given that such appraised values of the Mortgaged Properties have remained or will remain at their levels on the dates of origination of the related Mortgage Loans. If property values decline such that the outstanding balances of the Mortgage Loans, together with the outstanding balances of any Senior Liens, become equal to or greater than the value of the Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses could be higher than those heretofore experienced by the Master Servicer, as set forth above under "The Portfolio of Mortgage Loans," and in the mortgage lending industry. S-22 Difference between Statistic Calculation Pools and Closing Date Pools. The statistical information presented in this Prospectus Supplement is based on the Statistic Calculation Pools. The Statistic Calculation Pools reflect the Mortgage Loans acquired by the Sponsor through the Cut-Off Date, and the statistical information presented herein is based on the number and the principal balances of such Mortgage Loans as of the Cut-Off Date. These pools aggregated $195,075,834.30 with respect to Group I and $113,090,141.89 with respect to Group II. The Sponsor expects that the actual pools as of the Closing Date will represent approximately $210,000,000 in Mortgage Loans in Group I and approximately $120,000,000 in Mortgage Loans in Group II. The additional Mortgage Loans to be included in the final pools will represent Mortgage Loans acquired or to be acquired by the Sponsor on or prior to the Closing Date. In addition, with respect to the Statistic Calculation Pools, as to which statistical information is presented herein, some amortization of the Mortgage Loans contained in such pools will occur prior to the Closing Date. Moreover, certain loans included in the Statistic Calculation Pools may prepay in full or may be determined not to meet the eligibility requirements for the final pools and as a result may not be included in the final pools. As a result of the foregoing, the statistical distribution of characteristics as of the Closing Date for the final Mortgage Loan pools will vary somewhat from the statistical distribution of such characteristics of the Statistic Calculation Pools as presented in this Prospectus Supplement, although such variance will not be material. In the event that the Sponsor does not, as of the Closing Date, have the full amount of Mortgage Loans which the Sponsor expects to sell to the Trust on such date, (i.e., approximately $210,000,000 with respect to Group I and approximately $120,000,000 with respect to Group II) the Sponsor will reduce the size of the offering. The Sponsor does not expect that the original principal amount of any class will increase or decrease by more than 5% as a result of such non-delivery. Even if the full expected amount of Mortgage Loans is delivered, certain adjustments (plus or minus 5%) may occur between the class sizes. Group I The Mortgage Loans in the Group I Statistic Calculation Pool consist of 3,531 loans under which the related Mortgaged Properties are located in 49 states and the District of Columbia, as set forth herein. The Group I Statistic Calculation Pool had an aggregate principal balance of $195,075,834.30, the minimum principal balance of any of the Mortgage Loans in the Group I Statistic Calculation Pool was $2,288.11, the maximum principal balance thereof was $638,806.44 and the average principal balance of such Mortgage Loans was approximately $55,250. The Mortgage Rates on the Mortgage Loans in the Group I Statistic Calculation Pool ranged from 7.50% to 17.00% per annum, and the weighted average Mortgage Rate of such Mortgage Loans was 11.25% per annum. The original term to stated maturity of the Mortgage Loans in the Group I Statistic Calculation Pool ranged from 36 months to 360 months, the remaining term to stated maturity ranged from 2 months to 360 months, the weighted average original term to stated maturity was 225 months, the weighted average remaining term to stated maturity was 223 months and the weighted average seasoning was 2 months. No Mortgage Loan in the Group I Statistic Calculation Pool had a stated maturity later than December 15, 2026. 67.16% of the Mortgage Loans in the Group I Statistic Calculation Pool by aggregate principal balance require monthly payments of principal that will fully amortize the Mortgage Loans by their respective maturity dates, and 32.84% of such Mortgage Loans by aggregate principal balance are Balloon Loans. The weighted average CLTV of the Mortgage Loans included in the Group I Statistic Calculation Pool was 74.42%. The weighted average Junior Lien Ratio (as defined below) of the Mortgage Loans in the Group I Statistic Calculation Pool was 36.62%; the weighted average LTV was 69.19%. Approximately 89% of the Mortgage Loans in the Group I Statistic Calculation Pool by aggregate principal balance were secured by first mortgages and 11% by junior mortgages. The "Junior Lien Ratio" of a Mortgage Loan which is in a junior lien position is equal to the ratio (expressed as a percentage) of the original principal balance of such Mortgage Loan to the sum of (i) the original principal balance of such Mortgage Loan and (ii) the principal balance at the time of origination of the Mortgage Loan of any Senior Liens (computed at the time of origination of such Mortgage Loan). The following tables describe the Group I Mortgage Loans and the related Mortgaged Properties based upon the Group I Statistic Calculation Pool as of the opening of business on the Cut-Off Date. S-23 GROUP I GEOGRAPHIC DISTRIBUTION
Number of Aggregate % of Aggregate State Mortgage Loans Principal Balance Principal Balance Alabama.................. 47 $ 1,568,102.48 0.80% Arizona.................. 83 3,583,186.04 1.84 Arkansas................. 13 523,751.91 0.27 California............... 202 16,145,829.65 8.28 Colorado................. 91 5,556,001.36 2.85 Connecticut.............. 37 3,410,905.63 1.75 Delaware................. 17 1,323,184.06 0.68 District of Columbia..... 17 1,133,764.75 0.58 Florida.................. 201 10,648,410.60 5.46 Georgia.................. 86 4,414,376.64 2.26 Hawaii................... 10 1,380,437.64 0.71 Iowa..................... 7 335,100.08 0.17 Idaho.................... 9 554,008.09 0.28 Illinois................. 193 12,471,108.18 6.39 Indiana.................. 156 7,469,813.81 3.83 Kansas................... 38 1,664,958.59 0.85 Kentucky................. 15 889,096.86 0.46 Louisiana................ 42 1,878,074.10 0.96 Maine.................... 3 176,959.34 0.09 Maryland................. 125 7,853,376.13 4.03 Massachusetts............ 50 3,638,914.01 1.87 Michigan................. 231 12,865,475.05 6.60 Minnesota................ 17 900,528.99 0.46 Mississippi.............. 24 768,620.19 0.39 Missouri................. 129 5,761,968.06 2.95 Montana.................. 2 150,875.00 0.07 Nebraska................. 11 476,254.25 0.24 Nevada................... 20 1,082,940.63 0.56 New Hampshire............ 1 147,867.83 0.07 New Jersey............... 97 7,297,415.17 3.74 New Mexico............... 15 901,465.25 0.46 New York................. 130 8,217,779.40 4.21 North Carolina........... 229 12,777,866.70 6.55 North Dakota............. 1 19,962.73 0.01 Ohio..................... 306 15,523,144.19 7.96 Oklahoma................. 22 753,128.65 0.39 Oregon................... 35 2,097,098.36 1.08 Pennsylvania............. 295 12,931,449.54 6.63 Rhode Island............. 14 788,942.21 0.40 South Carolina........... 136 6,184,440.58 3.17 South Dakota............. 3 130,593.50 0.07 Tennessee................ 50 2,851,529.62 1.46 Texas.................... 16 854,732.81 0.44 Utah..................... 63 2,928,246.61 1.50 Vermont.................. 5 310,076.98 0.16 Virginia................. 118 5,365,621.71 2.75 Washington............... 68 3,854,238.58 1.98 West Virginia............ 12 586,280.76 0.30 Wisconsin................ 28 1,398,298.45 0.72 Wyoming.................. 11 529,632.55 0.27 ------ ----------------- ------- TOTAL................. 3,531 $195,075,834.30 100.00% ===== =============== =======
S-24 GROUP I DISTRIBUTION OF CLTVs
Range of Number of Aggregate % of Aggregate CLTV Ratios Mortgage Loans Principal Balance Principal Balance 95.01 - 100%.............. 3 $ 82,925.49 0.04% 90.01 - 95.00............. 17 1,357,589.23 0.70 85.01 - 90.00............. 161 9,686,451.18 4.97 80.01 - 85.00............. 972 57,587,592.84 29.51 75.01 - 80.00............. 701 42,055,203.43 21.56 70.01 - 75.00............. 533 31,221,286.72 16.00 65.01 - 70.00............. 307 17,784,518.70 9.12 60.01 - 65.00............. 210 10,047,384.42 5.15 55.01 - 60.00............. 139 6,295,035.58 3.23 50.01 - 55.00............. 105 4,603,707.09 2.36 00.01 - 50.00............. 383 14,354,139.62 7.36 ----- -------------- ------ TOTAL.................. 3,531 $195,075,834.30 100.00% ===== ============== ======
GROUP I DISTRIBUTION OF LTVs
Range of Number of Aggregate % of Aggregate LTV Ratios Mortgage Loans Principal Balance Principal Balance 95.01 - 100%.............. 1 $ 15,300.00 0.01% 90.01 - 95.00............. 14 1,262,341.19 0.65 85.01 - 90.00............. 120 8,615,996.08 4.42 80.01 - 85.00............. 657 47,899,943.44 24.54 75.01 - 80.00............. 579 38,559,405.04 19.76 70.01 - 75.00............. 453 28,826,695.41 14.78 65.01 - 70.00............. 269 16,788,857.01 8.61 60.01 - 65.00............. 191 9,517,317.82 4.88 55.01 - 60.00............. 131 6,514,026.42 3.34 50.01 - 55.00............. 102 4,906,676.93 2.52 00.01 - 50.00............. 1,014 32,169,274.96 16.49 ----- -------------- ------ TOTAL.................. 3,531 $195,075,834.30 100.00% ===== ============== ======
S-25 GROUP I DISTRIBUTION OF JUNIOR LIEN RATIOS (Junior Liens Only)
Range of Number of Aggregate % of Aggregate Junior Lien Ratios Mortgage Loans Principal Balance Principal Balance 0.00 - 10.00%......... 14 $ 184,815.03 0.89% 10.01 - 20.00.......... 151 2,687,010.65 13.00 20.01 - 30.00.......... 231 6,474,395.82 31.33 30.01 - 40.00.......... 130 4,779,473.99 23.13 40.01 - 50.00.......... 66 2,179,052.35 10.54 50.01 - 60.00.......... 36 1,371,577.22 6.64 60.01 - 70.00.......... 27 1,274,537.54 6.17 70.01 - 80.00.......... 25 1,155,393.65 5.59 80.01 - 90.00.......... 8 394,339.79 1.91 90.01 - 100.00......... 6 163,753.16 0.80 ---- -------------- ------- TOTAL............... 694 $20,664,349.20 100.00% ==== ============== =======
GROUP I DISTRIBUTION OF MORTGAGE RATES
Range of Number of Aggregate % of Aggregate Mortgage Rates Mortgage Loans Principal Balance Principal Balance 7.01 - 8.00%........................ 21 $ 1,693,652.53 0.87% 8.01 - 9.00......................... 191 10,471,694.36 5.37 9.01 - 10.00........................ 553 37,701,903.97 19.33 10.01 - 11.00........................ 768 51,068,574.47 26.17 11.01 - 12.00........................ 645 37,710,147.12 19.33 12.01 - 13.00........................ 679 30,961,010.44 15.87 13.01 - 14.00........................ 382 15,997,008.09 8.20 14.01 - 15.00........................ 206 6,561,537.67 3.36 15.01 - 16.00........................ 73 2,510,010.51 1.29 16.01 - 17.00........................ 13 400,295.14 0.21 ------ --------------- ------ TOTAL............................. 3,531 $195,075,834.30 100.00% ===== ============== ======
S-26 GROUP I REMAINING TERM TO MATURITY DISTRIBUTION
Number of Aggregate % of Aggregate Months Mortgage Loans Principal Balance Principal Balance 0 - 12................. 6 $ 325,086.45 0.17% 13 - 24................. 9 623,746.23 0.32 25 - 36................. 8 343,471.13 0.18 37 - 48................. 9 295,862.39 0.15 49 - 60................. 66 1,721,501.23 0.88 61 - 72................. 16 478,291.42 0.25 73 - 84................. 49 1,730,882.50 0.89 85 - 96................. 47 1,522,288.98 0.78 97 - 108................. 16 462,619.47 0.24 109 - 120................. 245 7,098,232.85 3.64 121 - 132................. 6 615,558.24 0.32 133 - 144................. 35 1,474,535.82 0.76 145 - 156................. 11 387,383.61 0.20 157 - 168................. 8 258,217.65 0.13 169 - 180................. 1,988 107,749,930.07 55.22 181 - 192................. 4 290,005.84 0.15 193 - 204................. 1 61,870.40 0.03 205 - 216................. 5 415,821.84 0.21 217 - 228................. 122 7,680,945.40 3.94 229 - 240................. 189 11,313,333.28 5.80 253 - 264................. 1 50,946.42 0.03 277 - 288................. 1 44,993.06 0.02 289 - 300................. 12 758,811.22 0.39 313 - 324................. 2 281,660.50 0.14 325 - 336................. 7 416,409.71 0.21 337 - 348................. 3 133,352.06 0.07 349 - 360................. 665 48,540,076.53 24.88 ----- -------------- ------ TOTAL.................. 3,531 $195,075,834.30 100.00% ===== ============== ======
S-27 GROUP I DISTRIBUTION OF PRINCIPAL BALANCES
Range of Number of Aggregate % of Aggregate Principal Balances Mortgage Loans Principal Balance Principal Balance $ 1 - 5,000.......... 2 $ 7,090.40 0.00% 5,001 - 10,000.......... 33 272,772.61 0.14 10,001 - 15,000.......... 155 2,085,553.21 1.07 15,001 - 20,000.......... 237 4,251,130.23 2.18 20,001 - 25,000.......... 256 5,848,869.64 3.00 25,001 - 30,000.......... 264 7,358,970.27 3.77 30,001 - 35,000.......... 271 8,914,290.26 4.57 35,001 - 40,000.......... 289 10,935,028.47 5.61 40,001 - 45,000.......... 241 10,327,667.10 5.29 45,001 - 50,000.......... 233 11,128,202.50 5.70 50,001 - 55,000.......... 205 10,763,196.53 5.52 55,001 - 60,000.......... 206 11,875,459.18 6.09 60,001 - 65,000.......... 167 10,486,341.86 5.38 65,001 - 70,000.......... 139 9,419,310.06 4.83 70,001 - 75,000.......... 119 8,631,624.32 4.42 75,001 - 80,000.......... 84 6,503,536.36 3.33 80,001 - 85,000.......... 77 6,381,759.48 3.27 85,001 - 90,000.......... 72 6,331,016.27 3.25 90,001 - 95,000.......... 54 5,010,366.90 2.57 95,001 - 100,000.......... 52 5,094,332.00 2.61 100,001 - 150,000.......... 275 32,596,746.47 16.71 150,001 - 200,000.......... 64 10,944,961.30 5.61 200,001 - 250,000.......... 21 4,779,834.18 2.45 250,001 - 300,000.......... 8 2,181,400.82 1.12 300,001 - 350,000.......... 2 660,000.00 0.34 350,001 - 400,000.......... 2 766,496.66 0.39 400,001 - 450,000.......... 2 881,070.78 0.45 600,001 - 650,000.......... 1 638,806.44 0.33 ------ --------------- ------ TOTAL................... 3,531 $195,075,834.30 100.00% ===== ============== ======
S-28 GROUP I DISTRIBUTION OF PROPERTY TYPES
Number of Aggregate % of Aggregate Property Type Mortgage Loans Principal Balance Principal Balance SF Detached/DeMin PUD..................... 3,154 $174,937,998.60 89.68% SF Row House/Townhouse/Condo.............. 119 5,305,656.04 2.72 Two to Four Family Home................... 160 10,014,540.78 5.13 Other..................................... 98 4,817,638.88 2.47 ----- ------------ ------ TOTAL................................... 3,531 $195,075,834.30 100.00% ===== ============== ======
GROUP I DISTRIBUTION OF OCCUPANCY STATUS
Number of Aggregate % of Aggregate Occupancy Status Mortgage Loans Principal Balance Principal Balance Owner occupied*.................... 3,219 $178,450,442.04 91.48% Investor owned..................... 312 16,625,392.26 8.52 ----- -------------- ------ TOTAL........................... 3,531 $195,075,834.30 100.00% ===== ============== =======
- --------------- * Includes vacation and second homes. GROUP I DISTRIBUTION OF SEASONING
Months Elapsed Since Number of Aggregate % of Aggregate Origination Mortgage Loans Principal Balance Principal Balance 0 - 6........... 3,415 $189,193,249.66 96.98% 7 - 12........... 28 1,457,587.59 0.75 13 - 24........... 16 691,410.69 0.35 25 - 36........... 18 1,147,105.96 0.59 37 - 48........... 14 947,749.36 0.49 49 - 60........... 7 704,083.24 0.36 61 - 72........... 7 185,918.27 0.10 73 - 84........... 9 247,465.61 0.13 85 - 96........... 5 131,146.11 0.07 97 - 108........... 7 240,503.05 0.12 109 - 120........... 4 122,638.09 0.06 145 - 156........... 1 6,976.67 0.00 ------ -------------- ------ TOTAL............ 3,531 $195,075,834.30 100.00% ====== ============== ======
S-29 Group II The Mortgage Loans in the Group II Statistic Calculation Pool consist of 1,091 loans under which the related Mortgaged Properties are located in 42 states, as set forth herein. The Mortgage Loans in the Group II Statistic Calculation Pool had an aggregate principal balance of $113,090,141.89, the minimum principal balance of any of such Mortgage Loans was $1,996.80, the maximum principal balance thereof was $825,000 and the average principal balance of such Mortgage Loans was approximately $103,700. The weighted average current Mortgage Rate of the Mortgage Loans in the Group II Statistic Calculation Pool was 10.28% and the weighted average margin was 5.70%. The Mortgage Loans in the Group II Statistic Calculation Pool have original terms to stated maturity from 60 months to 360 months, remaining terms to stated maturity from 57 months to 360 months, a weighted average remaining term to stated maturity of 350 months, a weighted average original term to stated maturity of 354 months and a weighted average seasoning of 4 months. No Mortgage Loan in the Group II Statistic Calculation Pool had a stated maturity later than December 15, 2026. 99.48% of the Mortgage Loans in the Group II Statistic Calculation Pool by aggregate principal balance require monthly payments of principal that will fully amortize such Mortgage Loans by their respective maturity dates. 0.52% of the Mortgage Loans in the Group II Statistic Calculation Pool by aggregate principal balance are represented by Balloon Loans having a 30-year amortization schedule and a 7-year maturity. The weighted average LTV of the Mortgage Loans included in the Group II Statistic Calculation Pool was 77.61%. 99.26% of the Mortgage Loans in the Group II Statistic Calculation Pool were secured by first mortgages. 88.71% of the Mortgage Loans in the Group II Statistic Calculation Pool bear interest (in some instances, following an initial fixed-rate period) at a six-month LIBOR rate, plus a margin. 82.53% are indexed on the average of the six-month LIBOR rates based on quotations at five major banks as set forth in the "Money Rates" section of The Wall Street Journal, Western Edition, on the first business day of the month; 1.71% are indexed on the average of the six-month LIBOR rates based on quotations of major banks, as published by the Federal National Mortgage Association ("FNMA"), on the first business day of the month; 3.89% are indexed on the average of the six-month LIBOR rates based on quotations at five major banks as set forth in the "Money Rates" section of the Wall Street Journal, Western Edition, on the most recent daily quote available; 0.57% are indexed on the average of the six-month LIBOR rates based on quotations at five major banks as set forth in the "Money Rates" section of The Wall Street Journal, Western Edition, on the fifteenth day of the month; and 11.21% are indexed on the weekly average of the one-year constant maturity treasury. Less than 0.10% have indices other than 6-month LIBOR and the one-year constant maturity treasury. With respect to the Mortgage Loans in the Group II Statistic Calculation Pool, 18.38% of such Mortgage Loans bear interest at a fixed rate of interest for a three-year period following origination, and 30.08% of such Mortgage Loans bear interest at a fixed rate of interest for a five year period following origination; after such initial periods, such Mortgage Loans bear interest at adjustable rates, as described above. 88.49% of the loans in the Group II Statistic Calculation Pool have semi-annual interest rate and semi-annual payment adjustment frequencies. 11.47% of the loans in the Group II Statistic Calculation Pool have annual interest rate and annual payment adjustment frequencies. The Mortgage Loans in the Group II Statistic Calculation Pool have a weighted average margin of 5.70%. The margins for the Mortgage Loans in the Group II Statistic Calculation Pool range from 2.50% to 9.00%. 58.05% of the Mortgage Loans in the Group II Statistic Calculation Pool have a periodic rate adjustment cap of 1.00%, 26.98% of such Mortgage Loans have a periodic rate adjustment cap of 1.25%; 2.77% of the Mortgage Loans in the Group II Statistic Calculation Pool have a periodic rate adjustment cap of 1.50% and 12.20% have a periodic rate adjustment cap of 2.00%. 90.19% of the Mortgage Loans in the Group II Statistic Calculation Pool have a lifetime cap of 7.00%; 8.34% have a lifetime cap of 6.00%; 0.86% have a lifetime cap of 6.50%; and 0.04% have a lifetime cap of 5.0%. The weighted average number of months until the next reset date is approximately 27 months. The weighted average maximum Mortgage Rate was 17.01%, with maximum Mortgage Rates that range from 10.50% to 21.75%. The weighted average minimum Mortgage Rate was 9.51%, with minimum Mortgage Rates that range from 2.50% to 14.49%. S-30 The following tables describe the Group II Mortgage Loans and the related Mortgaged Properties based upon the Group II Statistic Calculation Pool as of the opening of business on the Cut-Off Date. GROUP II GEOGRAPHIC DISTRIBUTION
Number of Aggregate % of Aggregate State Mortgage Loans Principal Balance Principal Balance Alabama................... 4 $ 207,205.13 0.18% Arizona................... 15 1,197,478.65 1.06 Arkansas.................. 1 22,312.10 0.02 California................ 166 24,108,850.59 21.32 Colorado.................. 30 3,913,140.61 3.46 Connecticut............... 7 584,316.26 0.52 Delaware.................. 4 257,385.60 0.23 Florida................... 21 2,759,685.15 2.44 Georgia................... 11 1,566,228.20 1.38 Idaho..................... 10 682,327.85 0.60 Illinois.................. 49 4,983,251.30 4.41 Indiana................... 30 2,150,137.28 1.90 Iowa...................... 4 197,471.77 0.17 Kansas.................... 1 22,970.83 0.02 Kentucky.................. 17 1,072,924.33 0.95 Louisiana................. 11 796,488.43 0.70 Maine..................... 2 207,700.00 0.18 Maryland.................. 29 3,256,204.62 2.88 Massachusetts............. 13 1,570,985.76 1.39 Michigan.................. 49 4,602,902.39 4.07 Minnesota................. 2 143,149.47 0.13 Missouri.................. 8 491,909.68 0.43 Montana................... 3 261,668.42 0.23 Nebraska.................. 2 111,775.00 0.10 Nevada.................... 17 2,434,915.17 2.15 New Hampshire............. 1 74,833.11 0.07 New Jersey................ 29 3,450,467.17 3.05 New York.................. 19 2,133,165.09 1.89 North Carolina............ 12 1,219,801.09 1.08 Ohio...................... 132 9,744,381.94 8.62 Oklahoma.................. 13 719,700.54 0.64 Oregon.................... 78 8,789,079.08 7.77 Pennsylvania.............. 59 5,154,644.50 4.56 Rhode Island.............. 2 335,868.81 0.30 South Carolina............ 3 513,654.93 0.45 Tennessee................. 4 255,039.40 0.23 Texas..................... 12 1,202,233.86 1.06 Utah...................... 40 4,451,579.61 3.94 Virginia.................. 38 3,517,294.66 3.11 Washington................ 135 13,213,226.34 11.68 Wisconsin................. 7 659,816.76 0.58 West Virginia............. 1 51,970.41 0.05 ------ --------------- ------- TOTAL.................. 1,091 $113,090,141.89 100.00% ===== ============== ======
S-31 GROUP II DISTRIBUTION OF LTVs
Number of Aggregate % of Aggregate Range of LTV Ratios Mortgage Loans Principal Balance Principal Balance 90.01 - 95.00%........... 3 $ 377,450.58 0.34% 85.01 - 90.00............ 33 3,778,214.30 3.34 80.01 - 85.00............ 402 43,974,772.25 38.88 75.01 - 80.00............ 276 30,243,338.97 26.74 70.01 - 75.00............ 160 16,128,309.22 14.26 65.01 - 70.00............ 64 7,412,052.14 6.55 60.01 - 65.00............ 50 4,057,536.87 3.59 55.01 - 60.00............ 24 1,913,871.69 1.69 50.01 - 55.00............ 17 1,240,954.67 1.11 00.01 - 50.00............ 62 3,963,641.20 3.50 -------------- ------- TOTAL.................. 1,091 $113,090,141.89 100.00% ===== ============== ======
GROUP II DISTRIBUTION OF CURRENT MORTGAGE RATES
Range of Current Number of Aggregate % of Aggregate Mortgage Rates Mortgage Loans Principal Balance Principal Balance 6.01 - 7.00% ........... 1 $ 145,000.00 0.13% 7.01 - 8.00............. 14 1,999,595.96 1.77 8.01 - 9.00............. 119 14,726,280.45 13.02 9.01 - 10.00............. 317 36,424,603.91 32.21 10.01 - 11.00............. 323 33,303,799.06 29.45 11.01 - 12.00............. 202 17,824,277.90 15.76 12.01 - 13.00............. 94 7,069,043.11 6.25 13.01 - 14.00............. 18 1,411,710.44 1.25 14.01 - 15.00............. 3 185,831.06 0.16 ----- -------------- ------ TOTAL.................. 1,091 $113,090,141.89 100.00% ===== ============== ======
S-32 GROUP II REMAINING TERM TO MATURITY DISTRIBUTION
Number of Aggregate % of Aggregate Months Mortgage Loans Principal Balance Principal Balance 49 - 60................. 4 $ 200,549.21 0.18% 73 - 84................. 4 465,841.38 0.41 109 - 120................. 2 112,854.59 0.10 133 - 144................. 1 59,207.25 0.05 169 - 180................. 26 1,300,621.86 1.15 217 - 228................. 4 301,744.80 0.27 229 - 240................. 23 1,596,207.86 1.41 241 - 252................. 1 13,376.58 0.01 253 - 264................. 1 29,506.75 0.03 289 - 300................. 2 144,150.37 0.13 313 - 324................. 2 237,343.92 0.21 337 - 348................. 43 4,164,229.16 3.68 349 - 360................. 978 104,464,508.16 92.37 ----- -------------- ------ TOTAL.................. 1,091 $113,090,141.89 100.00% ===== ============== ======
S-33 GROUP II DISTRIBUTION OF PRINCIPAL BALANCES
Range of Number of Aggregate % of Aggregate Principal Balances Mortgage Loans Principal Balance Principal Balance $ 1 - 5,000... 1 $ 1,996.80 0.00% 10,001 - 15,000... 4 55,227.56 0.05 15,001 - 20,000... 8 143,068.65 0.13 20,001 - 25,000... 12 281,218.42 0.25 25,001 - 30,000... 23 647,064.23 0.57 30,001 - 35,000... 22 730,283.11 0.65 35,001 - 40,000... 30 1,123,129.72 0.99 40,001 - 45,000... 35 1,490,119.89 1.32 45,001 - 50,000... 47 2,242,157.93 1.98 50,001 - 55,000... 50 2,609,601.97 2.31 55,001 - 60,000... 56 3,209,182.86 2.84 60,001 - 65,000... 56 3,516,731.75 3.11 65,001 - 70,000... 52 3,525,681.36 3.12 70,001 - 75,000... 51 3,706,036.98 3.28 75,001 - 80,000... 53 4,126,731.54 3.65 80,001 - 85,000... 46 3,800,297.30 3.36 85,001 - 90,000... 33 2,891,649.54 2.56 90,001 - 95,000... 46 4,272,973.10 3.78 95,001 - 100,000... 41 4,012,015.99 3.55 100,001 - 150,000... 240 29,378,901.20 25.97 150,001 - 200,000... 104 17,776,266.11 15.71 200,001 - 250,000... 43 9,595,298.56 8.48 250,001 - 300,000... 11 3,066,802.09 2.71 300,001 - 350,000... 14 4,544,082.57 4.02 350,001 - 400,000... 4 1,502,008.99 1.33 400,001 - 450,000... 2 851,461.35 0.75 450,001 - 500,000... 5 2,467,514.18 2.18 650,001 - 700,000... 1 697,638.14 0.62 800,001 - 850,000... 1 825,000.00 0.73 ----- -------------- ------ TOTAL............ 1,091 $113,090,141.89 100.00% ===== ============== ======
S-34 GROUP II DISTRIBUTION OF PROPERTY TYPES
Number of Aggregate % of Aggregate Property Description Mortgage Loans Principal Balance Principal Balance SF Detached/De Min PUD............. 982 $101,946,943.89 90.15% SF Row House/Townhouse/Condo....... 35 2,944,755.07 2.60 Two to Four Family Home............ 64 7,393,175.86 6.54 Other.............................. 10 805,267.07 0.71 ------ --------------- ------- TOTAL........................... 1,091 $113,090,141.89 100.00% ===== ============== ======
GROUP II DISTRIBUTION OF OCCUPANCY STATUS
Number of Aggregate % of Aggregate Occupancy Status Mortgage Loans Principal Balance Principal Balance Owner occupied*.................... 978 $101,849,450.06 90.06% Investor owned..................... 113 11,240,691.83 9.94 ------ --------------- ------- TOTAL........................... 1,091 $113,090,141.89 100.00% ===== ============== ======
- --------------- * Includes vacation and second homes. GROUP II DISTRIBUTION OF SEASONING
Months Elapsed Number of Aggregate % of Aggregate Since Origination Mortgage Loans Principal Balance Principal Balance 0 - 6........... 839 $ 88,248,566.45 78.03% 7 - 12........... 233 23,194,484.68 20.51 13 - 24........... 14 1,244,971.42 1.10 25 - 36........... 1 121,892.09 0.11 37 - 48........... 2 237,343.92 0.21 97 - 108........... 1 29,506.75 0.03 109 - 120........... 1 13,376.58 0.01 ------ ---------------- ------ TOTAL............... 1,091 $113,090,141.89 100.00% ===== ================ ======
S-35 GROUP II DISTRIBUTION OF MAXIMUM MORTGAGE RATES
Range of Maximum Number of Aggregate % of Aggregate Mortgage Rates Mortgage Loans Principal Balance Principal Balance 10.50 to 10.99%........... 1 $ 159,146.43 0.14% 11.50 to 11.99............ 1 78,197.49 0.08 13.00 to 13.49............ 2 365,664.31 0.32 13.50 to 13.99............ 1 146,187.41 0.13 14.00 to 14.49............ 11 1,116,381.05 0.99 14.50 to 14.99............ 21 2,264,761.21 2.00 15.00 to 15.49............ 63 8,249,515.97 7.29 15.50 to 15.99............ 131 16,640,635.09 14.71 16.00 to 16.49............ 116 13,327,795.03 11.79 16.50 to 16.99............ 179 20,297,638.28 17.95 17.00 to 17.49............ 139 13,571,492.10 12.00 17.50 to 17.99............ 128 12,426,243.92 10.99 18.00 to 18.49............ 88 7,768,037.27 6.87 18.50 to 18.99............ 97 8,167,757.31 7.22 19.00 to 19.49............ 47 3,396,621.97 3.00 19.50 to 19.99............ 45 3,497,584.20 3.09 20.00 to 20.49............ 8 401,384.62 0.35 20.50 to 20.99............ 10 1,029,267.17 0.91 21.00 to 21.49............ 2 157,784.22 0.14 21.50 to 21.99............ 1 28,046.84 0.03 ----- -------------- ------ TOTAL.................. 1,091 $113,090,141.89 100.00% ===== ============== ======
S-36 GROUP II DISTRIBUTION OF MINIMUM MORTGAGE RATES
Range of Minimum Number of Aggregate % of Aggregate Mortgage Rates Mortgage Loans Principal Balance Principal Balance 2.50 to 2.99%............... 1 $ 159,146.43 0.14% 3.50 to 3.99 ............... 1 78,197.49 0.07 4.00 to 4.49 ............... 2 177,126.74 0.16 4.50 to 4.99 ............... 8 695,813.18 0.62 5.00 to 5.49 ............... 10 1,012,616.28 0.90 5.50 to 5.99 ............... 10 865,794.53 0.77 6.00 to 6.49 ............... 7 770,854.30 0.68 6.50 to 6.99 ............... 12 907,761.62 0.80 7.00 to 7.49 ............... 13 1,589,912.50 1.41 7.50 to 7.99 ............... 15 1,876,288.85 1.66 8.00 to 8.49 ............... 60 7,370,344.23 6.52 8.50 to 8.99 ............... 117 14,728,571.80 13.02 9.00 to 9.49 ............... 260 27,967,836.66 24.73 9.50 to 9.99 ............... 168 18,313,165.94 16.19 10.00 to 10.49 .............. 123 12,547,892.33 11.10 10.50 to 10.99 .............. 120 11,319,611.49 10.01 11.00 to 11.49 .............. 78 6,637,594.91 5.87 11.50 to 11.99 .............. 44 3,386,198.32 2.99 12.00 to 12.49 .............. 25 1,826,213.86 1.61 12.50 to 12.99 .............. 10 511,332.05 0.45 13.00 to 13.49 .............. 4 196,014.14 0.17 13.50 to 13.99 .............. 2 117,832.08 0.10 14.00 to 14.49 .............. 1 34,022.16 0.03 ------ ---------------- ------- TOTAL................... 1,091 $113,090,141.89 100.00% ===== ============== ======
GROUP II DISTRIBUTION OF MARGINS
Range of Number of Aggregate % of Aggregate Margins Mortgage Loans Principal Balance Principal Balance - -------- -------------- ----------------- ------------------ 2.01to 3.00%.............. 3 $ 493,797.52 0.44% 3.01 to 4.00............... 11 808,066.83 0.71 4.01 to 5.00............... 234 24,534,364.13 21.69 5.01 to 6.00............... 455 50,251,628.60 44.44 6.01 to 7.00............... 306 29,476,532.84 26.06 7.01 to 8.00............... 63 5,901,073.01 5.22 8.01 to 9.00............... 19 1,624,678.96 1.44 ------ --------------- ------- TOTAL................... 1,091 $113,090,141.89 100.00% ===== ============== ======
S-37 GROUP II NEXT INTEREST ADJUSTMENT DATE DISTRIBUTION
Next Interest Number of Aggregate % of Aggregate Adjustment Date Mortgage Loans Principal Balance Principal Balance - --------------- --------------- ----------------- ----------------- December, 1996............ 42 $5,187,465.02 4.59% January, 1997............. 25 3,098,323.82 2.74 February, 1997............ 48 5,170,740.14 4.57 March, 1997............... 67 7,251,831.60 6.41 April, 1997............... 75 8,888,962.98 7.85 May, 1997................. 74 9,450,817.60 8.35 June, 1997................ 12 1,635,813.61 1.45 July, 1997................ 6 496,366.00 0.44 August, 1997.............. 10 958,071.82 0.85 September, 1997........... 18 2,161,607.80 1.91 October, 1997............. 22 2,589,287.68 2.29 November, 1997............ 23 3,853,201.65 3.41 December, 1997............ 7 767,126.58 0.68 January, 1998............. 1 157,346.79 0.14 June, 1998................ 1 215,545.61 0.19 August, 1998.............. 8 1,151,198.86 1.02 September, 1998........... 15 1,875,172.47 1.66 October, 1998............. 17 2,148,115.99 1.90 November, 1998............ 17 1,202,601.17 1.06 December, 1998............ 1 93,600.00 0.08 March, 1999............... 1 64,397.01 0.06 April, 1999............... 6 551,785.43 0.49 May, 1999................. 13 1,438,985.96 1.27 June, 1999................ 2 130,534.96 0.12 July, 1999................ 4 439,991.45 0.39 August, 1999.............. 18 1,444,865.93 1.28 September, 1999........... 28 2,569,387.56 2.27 October, 1999............. 60 5,328,656.94 4.71 November, 1999............ 64 6,695,357.77 5.91 December, 1999............ 21 1,955,411.00 1.73 October, 2000............. 6 496,498.64 0.44 November, 2000............ 17 1,606,245.28 1.42 December, 2000............ 33 2,792,378.84 2.47 January, 2001............. 35 3,565,610.20 3.15 February, 2001............ 26 1,866,910.90 1.65 March, 2001............... 13 987,521.11 0.87 April, 2001............... 3 141,997.45 0.13 June, 2001................ 1 67,254.30 0.06 July, 2001................ 1 23,299.36 0.02 August, 2001.............. 46 4,427,956.97 3.92 September, 2001........... 77 7,229,280.10 6.39 October, 2001............. 60 5,188,287.36 4.59 November, 2001............ 47 4,375,090.48 3.87 December, 2001............ 17 1,244,075.00 1.10 June, 2003................ 1 51,920.63 0.05 July, 2003................ 1 30,931.97 0.03 August, 2003.............. 1 22,312.10 0.02 ------ --------------- ------- TOTAL.................. 1,091 $113,090,141.89 100.00% ===== ============== ======
PREPAYMENT AND YIELD CONSIDERATIONS The weighted average life of, and, if purchased at other than par, the yield to maturity on an Offered Certificate will be directly related to the rate of payment of principal of the Mortgage Loans in the related Mortgage Loan Group, including for this purpose voluntary payment in whole or in part of Mortgage Loans in the Mortgage Loan Group prior to stated maturity (a "Prepayment"), liquidations due to defaults, casualties and condemnations, and repurchases of Mortgage Loans in the related Mortgage Loan Group by the Sponsor, the Originators, the Master Servicer or the Certificate Insurer. The actual rate of principal prepayments on pools of mortgage loans is influenced by a variety of S-38 economic, tax, geographic, demographic, social, legal and other factors and has fluctuated considerably in recent years. In addition, the rate of principal prepayments may differ among pools of mortgage loans at any time because of specific factors relating to the mortgage loans in the particular pool, including, among other things, the age of the mortgage loans, the geographic locations of the properties securing the loans and the extent of the mortgagors' equity in such properties, and changes in the mortgagors' housing needs, job transfers and unemployment. The timing of changes in the rate of prepayments may significantly affect the actual yield to investors, even if the average rate of principal prepayments is consistent with the expectations of investors. In general, the earlier the payment of principal of the Mortgage Loans the greater the effect on an investor's yield to maturity. As a result, the effect on an investor's yield of prepayments occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of the Offered Certificates will not be offset by a subsequent like reduction (or increase) in the rate of principal prepayments. Investors must make their own decisions as to the appropriate prepayment assumptions to be used in deciding whether to purchase any of the Offered Certificates. The Sponsor makes no representations or warranties as to the rate of prepayment or the factors to be considered in connection with such determination. Projected Prepayments and Yields for Offered Certificates If purchased at other than par, the yield to maturity on an Offered Certificate will be affected by the rate of the payment of principal of the Mortgage Loans in the related Mortgage Loan Group. If the actual rate of payments on the Mortgage Loans in the related Mortgage Loan Group is slower than the rate anticipated by an investor who purchases an Offered Certificate of the related class at a discount, the actual yield to such investor will be lower than such investor's anticipated yield. If the actual rate of payments on the Mortgage Loans in the related Mortgage Loan Group is faster than the rate anticipated by an investor who purchases an Offered Certificate of the related class at a premium, the actual yield to such investor will be lower than such investor's anticipated yield. The Mortgage Loans in Group I are fixed-rate mortgage loans. The rate of prepayments with respect to conventional fixed rate mortgage loans has fluctuated significantly in recent years. In general, if prevailing interest rates fall significantly below the interest rates on fixed rate mortgage loans, such mortgage loans are likely to be subject to higher prepayment rates than if prevailing rates remain at or above the interest rate on such mortgage loans. However, the monthly payment on mortgage loans similar to the Mortgage Loans is often smaller than the monthly payment on a purchase-money first mortgage loan. Consequently, a decrease in the interest rate payable as a result of a refinancing would result in a relatively small reduction in the amount of the Mortgagor's monthly payment, as a result of the relatively small loan balance. Conversely, if prevailing interest rates rise appreciably above the interest rates on fixed rate mortgage loans, such mortgage loans are likely to experience a lower prepayment rate than if prevailing rates remain at or below the interest rates on such mortgage loans. 66.17% of the Mortgage Loans in the Group I Statistic Calculation Pool by aggregate principal balance had prepayment penalties. All of the Mortgage Loans in Group II are adjustable rate mortgage loans. As is the case with conventional fixed rate mortgage loans, adjustable rate mortgage loans may be subject to a greater rate of principal prepayments in a declining interest rate environment. For example, if prevailing interest rates fall significantly, adjustable rate mortgage loans could be subject to higher prepayment rates than if prevailing interest rates remain constant because the availability of fixed-rate mortgage loans at competitive interest rates may encourage mortgagors to refinance their adjustable rate mortgage loans to "lock in" a lower fixed interest rate. However, no assurance can be given as to the level of prepayments that the Mortgage Loans will experience. 69.78% of the Mortgage Loans in the Group II Statistic Calculation Pool by aggregate principal balance had prepayment penalties. The Final Scheduled Payment Date for the Offered Certificates is November 25, 2026, which is the Payment Date on which the Pooling and Servicing Agreement requires that the Class A-1 Certificate Principal Balance and the Class A-2 Certificate Principal Balance be reduced to zero. The original principal amounts of the Class A-1 Certificates and the Class A-2 Certificates, as of the Closing Date, less all amounts previously distributed to the Owners of such Offered Certificates (other than the Certificate Insurer) on account of principal shall be the "Class A-1 Certificate Principal Balance" and the "Class A-2 Certificate Principal Balance", respectively. S-39 The actual final Payment Date with respect to each class of Offered Certificates could occur significantly earlier than the final scheduled Payment Date because (i) Net Monthly Excess Cashflow will be used to make accelerated payments of principal (i.e., Subordination Increase Amounts) to the Owners of each class of Offered Certificates, which payments will have the effect of shortening the weighted average lives of the Offered Certificates of each class, (ii) Prepayments are likely to occur which shall be applied to the payment of the Class A Certificate Principal Balances and (iii) the Master Servicer may cause a termination of the Trust when the aggregate outstanding principal amount of the Mortgage Loans in the Trust has declined to 10% or less of the aggregate principal balance of the Mortgage Loans in the Trust as of the Closing Date. "Weighted average life" refers to the average amount of time that will elapse from the date of issuance of a security until each dollar of principal of such security will be repaid to the investor. The weighted average life of the Offered Certificates of each class will be influenced by the rate at which principal payments on the Mortgage Loans in the related Mortgage Loan Pool are paid, which may be in the form of scheduled amortization, accelerated amortization or prepayments (for this purpose, the term "prepayment" includes Prepayments and liquidations due to default) or as a result of an early termination of the Trust. Prepayments of mortgage loans are commonly measured relative to a prepayment standard or model. The model used in this Prospectus Supplement with respect to Group I is the Home Equity Prepayment ("HEP") assumption. HEP assumes that a pool of loans prepays in the first month at a constant prepayment rate that corresponds in CPR (as defined herein) to one-tenth the given HEP percentage and increases by an additional one-tenth each month thereafter until the tenth month, where it remains at a CPR equal to the given HEP percentage. The model used in this Prospectus Supplement with respect to Group II is the Constant Prepayment Rate ("CPR") assumption. The CPR represents an assumed constant rate of prepayment each month, expressed as an annual rate, relative to the then outstanding principal balance of a pool of mortgage loans for the life of such mortgage loans. Neither model purports to be either an historical description of the prepayment experience of any pool of mortgage loans or a prediction of the anticipated rate of prepayment of any mortgage loans, including the Mortgage Loans. The tables set forth below were prepared on the basis of the assumptions in the following paragraph (the "Structuring Assumptions") and there may be differences between the characteristics of the Mortgage Loans and the characteristics of the mortgage loans assumed in preparing the tables below. Any such difference may have an effect upon the percentage of the Class A-1 Certificate Principal Balance and the Class A-2 Certificate Principal Balance outstanding and weighted average lives of the Class A-1 Certificates and Class A-2 Certificates set forth in the tables below. In addition, since the Mortgage Loans may have characteristics which differ from those mortgage loans assumed in preparing the tables set forth below, the distributions of principal on the Class A Certificates may be made earlier or later than indicated in the tables. For the purpose of the tables below, it is assumed that: (i) the Mortgage Loans consist of synthetic mortgage loans having the characteristics set forth below; (ii) the Closing Date is December 19, 1996; (iii) distributions on the Certificates are made on the 25th day of each month regardless of the day on which the Payment Date actually occurs, commencing in January, 1997, in accordance with the priorities described herein; (iv) all prepayments are prepayments in full and include 30 days' interest thereon; (v) the "Specified Subordinated Amounts" (as defined under "Description of the Certificates -- Overcollateralization Provisions") are set initially as specified by the Certificate Insurer, and thereafter decrease as permitted by the Certificate Insurer; (vi) no synthetic mortgage loan referenced in clause (i) of this paragraph is ever delinquent; (vii) the assumed levels of one-month LIBOR, six-month LIBOR, and one year CMT are 5.6055%, 5.5313% and 5.4100%, respectively; (viii) all of the additional Mortgage Loans are delivered to the Trust by the Closing Date and (ix) an optional termination is exercised by the Master Servicer when the aggregate principal has declined to 10% or less of the aggregate principal balance of the Mortgage Loans as of the Closing Date. MORTGAGE POOLS Group I S-40
Original Remaining Original Gross Term to Term to Amortization Principal Coupon Maturity Maturity Term Amortization Balance Rate (months) (months) (months) Method Mortgage Loans as of the Closing Date $2,015,353.65 9.875% 59 31 351 Balloon 68,755,957.81 11.637 177 175 358 Balloon 10,786,125.74 11.845 106 105 106 Level Pay 56,637,723.62 11.424 179 176 179 Level Pay 21,832,774.56 10.683 234 233 234 Level Pay 55,489,306.00 10.744 359 357 359 Level Pay
S-41 Group II
Original Remaining Gross Term to Term to Principal Coupon Maturity Maturity First Reset Balance Rate (months) (months) (months) Margin ------- ------ -------- -------- ---------- ------ Mortgage Loans as of the Closing Date $ 5,712,943.90 9.789% 360 352 1 5.747% $ 3,412,177.26 10.024% 360 350 2 5.473% $ 5,694,524.82 9.851% 360 355 3 5.759% $ 7,986,426.30 9.528% 354 350 4 5.669% $ 9,789,395.52 9.785% 358 355 5 5.752% $12,462,889.97 9.825% 346 342 6 5.784% $ 7,370,361.06 10.225% 360 358 22 6.144% $21,043,981.23 10.433% 355 354 35 5.244% $17,519,906.83 11.113% 357 349 52 5.849% $19,538,845.64 10.971% 346 345 59 5.698% $11,906,450.08 9.528% 355 354 11 6.023% $ 1,593,170.05 10.417% 360 358 34 5.059% $ 514,853.65 10.525% 311 309 59 5.342% Principal Periodic Net Life Net Life Reset Balance Rate Cap Cap Floor Frequency Index ------- ---------- ----- ----- --------- ----- Mortgage Loans as of the Closing Dage $ 5,712,943.90 1.250% 15.719% 8.719% Semi-annual 6 mo LIBOR $ 3,412,177.26 1.242% 15.282% 8.315% Semi-annual 6 mo LIBOR $ 5,694,524.82 1.102% 15.636% 8.163% Semi-annual 6 mo LIBOR $ 7,986,426.30 1.085% 15.542% 8.633% Semi-annual 6 mo LIBOR $ 9,789,395.52 1.088% 15.705% 8.521% Semi-annual 6 mo LIBOR $12,462,889.97 1.225% 15.767% 8.522% Semi-annual 6 mo LIBOR $ 7,370,361.06 1.052% 16.162% 8.982% Semi-annual 6 mo LIBOR $21,043,981.23 1.029% 16.915% 9.605% Semi-annual 6 mo LIBOR $17,519,906.83 1.180% 17.607% 9.887% Semi-annual 6 mo LIBOR $19,538,845.64 1.002% 17.468% 9.054% Semi-annual 6 mo LIBOR $11,906,450.08 2.000% 16.008% 8.742% Annual 1 Year CMT $ 1,593,170.05 1.961% 16.917% 7.579% Annual 1 Year CMT $ 514,853.65 2.000% 17.025% 8.706% Annual 1 Year CMT
S-42 PREPAYMENT SCENARIOS
Scenario I Scenario II Scenario III Scenario IV Group I(1)................. 0% 20% 23% 28% Group II(2)................ 0% 20% 25% 30%
(1) As a percentage of HEP (2) As a percentage of CPR The following tables, which are based on the Structuring Assumptions, indicate (i) the percentages of the initial Class A-1 Certificate Principal Balance that would be outstanding after each of the dates shown at various percentages of HEP, in the case of Group I, and at various percentages of CPR, in the case of Group II, and the corresponding weighted average life of the Class A-1 Certificates and (ii) the percentages of the initial Class A-2 Certificate Principal Balance that would be outstanding after each of the dates shown at various percentages of HEP, in the case of Group I, and at various percentages of CPR, in the case of Group II, and the corresponding weighted average life of the Class A-2 Certificates. It is not likely that (i) all of the Mortgage Loans will have the characteristics assumed and (ii) the Mortgage Loans will prepay at the specified percentages of HEP, CPR or at any other constant percentage. Moreover, the diverse remaining terms to maturity of the Mortgage Loans could produce slower or faster principal distributions than indicated in the tables set forth below, even if the weighted average remaining term to maturity of the Mortgage Loans is consistent with the remaining terms to maturity of the synthetic mortgage loans referenced in clause (i) of the Structuring Assumptions set forth above. [Rest of page intentionally left blank] S-43 PERCENTAGE OF INITIAL CLASS A-1 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
Dates Scenario 1 Scenario 2 Scenario 3 Scenario 4 ----- ---------- ---------- ---------- ---------- Initial Balance 100 100 100 100 12/25/1997 96 80 78 74 12/25/1998 94 62 58 51 12/25/1999 91 47 42 34 12/25/2000 89 36 31 24 12/25/2001 87 28 23 17 12/25/2002 84 22 17 12 12/25/2003 81 17 13 0 12/25/2004 78 13 10 0 12/25/2005 74 10 0 0 12/25/2006 71 0 0 0 12/25/2007 67 0 0 0 12/25/2008 63 0 0 0 12/25/2009 58 0 0 0 12/25/2010 53 0 0 0 12/25/2011 22 0 0 0 12/25/2012 22 0 0 0 12/25/2013 20 0 0 0 12/25/2014 19 0 0 0 12/25/2015 17 0 0 0 12/25/2016 16 0 0 0 12/25/2017 15 0 0 0 12/25/2018 14 0 0 0 12/25/2019 12 0 0 0 12/25/2020 11 0 0 0 12/25/2021 10 0 0 0 12/25/2022 8 0 0 0 12/25/2023 6 0 0 0 12/25/2024 0 0 0 0 12/25/2025 0 0 0 0 11/25/2026 0 0 0 0 Weighted Average Life (years):(1) 13.4 3.7 3.2 2.7 Weighted Average Life (years):(2) 13.4 3.9 3.5 2.9
(1) To 10% Call. This assumes that an optional termination is exercised by the Master Servicer when the aggregate principal balance has declined to 10% or less of the aggregate principal balance of the Mortgage Loans as of the Closing Date. (2) To Maturity The weighted average life of the Class A-1 Certificates has been determined by (i) multiplying the amount of the reduction, if any, of the Class A-1 Certificate Principal Balance on each Payment Date by the number of years from the date of issuance to the related Payment Date, (ii) adding the results and (iii) dividing the sum by the aggregate amount of the reductions in the Class A-1 Certificate Principal Balance referred to in clause (i). S-44 PERCENTAGE OF INITIAL CLASS A-2 CERTIFICATE PRINCIPAL BALANCE OUTSTANDING
Dates Scenario 1 Scenario 2 Scenario 3 Scenario 4 ----- ---------- ---------- ---------- ---------- Initial Balance 100 100 100 100 12/25/1997 98 77 72 67 12/25/1998 97 60 52 45 12/25/1999 96 47 38 31 12/25/2000 96 37 28 22 12/25/2001 95 29 21 15 12/25/2002 94 23 16 10 12/25/2003 93 18 12 0 12/25/2004 92 15 9 0 12/25/2005 91 11 0 0 12/25/2006 89 0 0 0 12/25/2007 88 0 0 0 12/25/2008 86 0 0 0 12/25/2009 84 0 0 0 12/25/2010 82 0 0 0 12/25/2011 80 0 0 0 12/25/2012 77 0 0 0 12/25/2013 74 0 0 0 12/25/2014 71 0 0 0 12/25/2015 68 0 0 0 12/25/2016 63 0 0 0 12/25/2017 59 0 0 0 12/25/2018 54 0 0 0 12/25/2019 48 0 0 0 12/25/2020 42 0 0 0 12/25/2021 36 0 0 0 12/25/2022 29 0 0 0 12/25/2023 21 0 0 0 12/25/2024 0 0 0 0 12/25/2025 0 0 0 0 11/25/2026 0 0 0 0 Weighted Average Life (years):(1) 20.6 3.7 3.0 2.4 Weighted Average Life (years):(2) 20.7 4.1 3.2 2.6
(1) To 10% Call. This assumes that an optional termination is exercised by the Master Servicer when the aggregate principal balance has declined to 10% or less of the aggregate principal balance of the Mortgage Loans as of the Closing Date. (2) To Maturity The weighted average life of the Class A-2 Certificates has been determined by (i) multiplying the amount of the reduction, if any, of the Class A-2 Certificate Principal Balance on each Payment Date by the number of years from the date of issuance to the related Payment Date, (ii) adding the results and (iii) dividing the sum by the aggregate amount of the reductions in the Class A-2 Certificate Principal Balance referred to in clause (i). S-45 USE OF PROCEEDS The Sponsor will cause the Trust to acquire the Mortgage Loan concurrently with the sale of the Offered Certificates. The net proceeds from the sale of the Offered Certificates will be paid over to the Originators in consideration of the Transfer of the Mortgage Loans. Such amount will be determined as a result of the pricing of the Offered Certificates through the offering described in this Prospectus Supplement. The net proceeds to be received from the sale of the Mortgage Loans will be added to the Originators' general funds and will be available for general corporate purposes, including the repayment of debt and the purchase of new mortgage loans. THE SPONSOR AND THE MASTER SERVICER The Sponsor, Advanta Mortgage Conduit Services, Inc. is a direct subsidiary of Advanta Mortgage Corp. USA, the Master Servicer, and is an indirect subsidiary of Advanta Corp., a Delaware corporation ("Advanta Parent"), a publicly-traded company based in Horsham, Pennsylvania with assets as of September 30, 1996 in excess of $5.6 billion. Advanta Parent, through its subsidiaries (including the Master Servicer) managed assets (including mortgage loans) in excess of $18.3 billion as of September 30, 1996. See "The Sponsor and the Transferor" in the Prospectus. As of September 30, 1996, the Master Servicer and its subsidiaries were servicing approximately 40,000 Mortgage Loans in the Owned and Managed Servicing Portfolio representing an aggregate outstanding principal balance of approximately $2.3 billion, and approximately 42,000 mortgage loans in the Third-Party Servicing Portfolio representing an aggregate outstanding principal balance of approximately $2.1 billion. See "The Master Servicer" in the Prospectus. As of September 30, 1996, the Sponsor or its affiliates have issued, and the Master Servicer services, 28 issues of mortgage pass-through securities with an original balance of approximately $3.7 billion. The Trustee and the Certificate Insurer may remove the Master Servicer, and the Master Servicer may resign, only in accordance with the terms of the Pooling and Servicing Agreement. No removal or resignation shall become effective until the Trustee or a successor servicer shall have assumed the Master Servicer's responsibilities and obligations in accordance therewith. See "The Pooling and Servicing Agreement -- Removal and Resignation of the Master Servicer" in the Prospectus. The Master Servicer may not assign its obligations under the Pooling and Servicing Agreement, in whole or in part, unless it shall have first obtained the written consent of the Trustee and the Certificate Insurer, which consent is required not to be unreasonably withheld; provided, however, that any assignee must meet the eligibility requirements for a successor servicer set forth in the Pooling and Servicing Agreement. See "The Pooling and Servicing Agreement -- Removal and Resignation of the Master Servicer" in the Prospectus. The Master Servicer may enter into Sub-Servicing Agreements with qualified Sub-Servicers with respect to the servicing of all or any portion of the Mortgage Loans. The Pooling and Servicing Agreement will provide that affiliates of the Master Servicer which are qualified to service mortgage loans are qualified Sub-Servicers. No Sub-Servicing Agreements discharge the Master Servicer from its servicing obligations. See "Mortgage Loan Program -- Sub-Servicers" in the Prospectus. Upon removal or resignation of the Master Servicer, the Trustee may solicit bids for a successor servicer and, pending the appointment of a successor Servicer as a result of soliciting such bids, will be required to serve as Master Servicer. If the Trustee is unable to obtain a qualifying bid and is prevented by law from acting as servicer, the Trustee will be required to appoint, or petition a court of competent jurisdiction to appoint, an eligible successor. Any successor is required to be a housing and home finance institution, bank or mortgage servicing institution which has shareholders' equity of not less than $10,000,000 as determined in accordance with generally accepted accounting principles, and which is acceptable to the Certificate Insurer and shall assume all or any part of the responsibilities, duties or liabilities of the Master Servicer. The Certificates will not represent an interest in or obligation of, nor are the Mortgage Loans guaranteed by, the Sponsor, the Master Servicer or Advanta Parent, nor will they be insured or guaranteed by the Federal Deposit Insurance Corporation (the "FDIC") or any other governmental agency or instrumentality. S-46 DESCRIPTION OF THE CERTIFICATES General Persons in whose name a Certificate is registered in the Register maintained by the Trustee are the "Owners" of the Certificates. For so long as the Offered Certificates are in book-entry form with DTC, the only "Owner" of the Offered Certificates as the term "Owner" is used in the Pooling and Servicing Agreement will be Cede. No person acquiring a beneficial interest in an Offered Certificate (a "Beneficial Owner") will be entitled to receive a definitive certificate representing such person's interest in the Trust, except in the event that Physical Certificates are issued under limited circumstances set forth in the Pooling and Servicing Agreement. All references herein to the Owners of Offered Certificates shall mean and include the rights of Beneficial Owners, as such rights may be exercised through DTC and its participating organizations, except as otherwise specified in the Pooling and Servicing Agreement. See "Description of the Securities -- Form of Securities" in the Prospectus. Each class of Offered Certificates will evidence the right to receive on each Payment Date the Class A Distribution Amount for such class of Offered Certificates, in each case until the related Certificate Principal Balance has been reduced to zero. The Owners of the class of Class R Certificates will be entitled to receive distributions of residual Net Monthly Excess Cashflow not required for other purposes pursuant to the Pooling and Servicing Agreement. Payment Dates The Pooling and Servicing Agreement will require that the Trustee create and maintain a Distribution Account. See "Description of the Securities - -- Payments on Mortgage Loans; Deposits to Distribution Account" in the Prospectus. On the eighteenth day of each month (or, if such day is not a Business Day, the immediately following Business Day) (the "Remittance Date") the Master Servicer is required to withdraw from the Principal and Interest Account and remit to the Trustee, for deposit in the Distribution Account, the Monthly Remittance Amount. The Monthly Remittance Amount is the sum of the amounts collected by the Master Servicer in respect of the Mortgage Loans during the period beginning on the first day of the calendar month immediately preceding the month in which the related Remittance Date occurs and ending on the last day of such month (the "Remittance Period") plus any related Loan Purchase Prices, Substitution Amounts, Delinquency Advances and Compensating Interest, less the sum of certain amounts the Master Servicer is permitted to withdraw from the Principal and Interest Account, as described under "Description of the Securities -- Withdrawals from the Principal and Interest Account." Book Entry Registration of the Offered Certificates The Offered Certificates will be book-entry certificates (the "Book-Entry Certificates"). The Beneficial Owners may elect to hold their Offered Certificates through DTC in the United States, or CEDEL or Euroclear (in Europe) if they are participants of such systems ("Participants"), or indirectly through organizations which are Participants in such systems. The Book-Entry Certificates will be issued in one or more certificates per class of Offered Certificates which in the aggregate equal the principal balance of such Offered Certificates and will initially be registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of their Participants through customers' securities accounts in CEDEL's and Euroclear's names on the books of their respective depositaries which in turn will hold such positions in customers' securities accounts in the depositaries' names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan will act as depositary for Euroclear (in such capacities, individually the "Relevant Depositary" and collectively the "European Depositaries"). Investors may hold such beneficial interests in the Book-Entry Certificates in minimum denominations representing principal amounts of $1,000 and in integral multiples in excess thereof. Except as described below, no Beneficial Owner will be entitled to receive a physical certificate representing such Certificate (a "Definitive Certificate"). Unless and until definitive Certificates are issued, it is anticipated that the only "Owner" of such Offered Certificates will be Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as that term is used in the Pooling and Servicing Agreement. Beneficial Owners are only permitted to exercise their rights indirectly through Participants and DTC. The Beneficial Owner's ownership of a Book-Entry Certificate will be recorded on the records of the brokerage firm, bank, thrift institution or other financial intermediary (each, a "Financial Intermediary") that maintains the Beneficial Owner's account for such purpose. In turn, the Financial Intermediary's Ownership of such Book-Entry S-47 Certificate will be recorded on the records of DTC (or of a participating firm that acts as agent for the Financial Intermediary, whose interest will in turn be recorded on the records of DTC, if the Beneficial Owner's Financial Intermediary is not a DTC Participant and on the records of CEDEL or Euroclear, as appropriate). Beneficial Owners will receive all distributions of principal of, and interest on, the Offered Certificates from the Trustee through DTC and DTC Participants. While such Offered Certificates are outstanding (except under the circumstances described below), under the rules, regulations and procedures creating and affecting DTC and its operations (the "Rules"), DTC is required to make book-entry transfers among Participants on whose behalf it acts with respect to such Offered Certificates and is required to receive and transmit distributions of principal of, and interest on, such Offered Certificates. Participants and indirect participants with whom Beneficial Owners have accounts with respect to Offered Certificates are similarly required to make book-entry transfers and receive and transmit such distributions on behalf of their respective Beneficial Owners. Accordingly, although Beneficial Owners will not possess certificates, the Rules provide a mechanism by which Beneficial Owners will receive distributions and will be able to transfer their interest. Beneficial Owners will not receive or be entitled to receive certificates representing their respective interests in the Offered Certificates, except under the limited circumstances described below. Unless and until Definitive Certificates are issued, Beneficial Owners who are not Participants may transfer ownership of Offered Certificates only through Participants and indirect participants by instructing such Participants and indirect participants to transfer such Offered Certificates, by book-entry transfer, through DTC for the account of the purchasers of such Offered Certificates, which account is maintained with their respective Participants. Under the Rules and in accordance with DTC's normal procedures, transfers of ownership of such Offered Certificates will be executed through DTC and the accounts of the respective Participants at DTC will be debited and credited. Similarly, the Participants and indirect participants will make debits or credits, as the case may be, on their records on behalf of the selling and purchasing Beneficial Owners. Because of time zone differences, credits of securities received in CEDEL or Euroclear as a result of a transaction with a Participant will be made during subsequent securities settlement processing and dated the business day following the DTC settlement date. Such credits or any transactions in such securities settled during such processing will be reported to the relevant Euroclear or CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as a result of sales of securities by or through a CEDEL Participant (as defined below) or Euroclear Participant (as defined below) to a DTC Participant will be received with value on the DTC settlement date but will be available in the relevant CEDEL or Euroclear cash account only as of the business day following settlements in DTC. For information with respect to tax documentation procedures relating to the Certificates, see "Certain Federal Income Tax Consequences -- Foreign Investors" and " -- Backup Withholding" in the Prospectus and "Global Clearance, Settlement and Tax Documentation Procedures -- Certain U.S. Federal Income Tax Documentation Requirements" in Annex I to this Prospectus Supplement. Transfers between Participants will occur in accordance with DTC rules. Transfers between CEDEL Participants and Euroclear Participants will occur in accordance with their respective rules and operating procedures. Cross-market transfers between persons holding directly or indirectly through DTC, on the one hand, and directly or indirectly through CEDEL Participants or Euroclear Participants, on the other, will be effected in DTC in accordance with DTC rules on behalf of the relevant European international clearing system by the Relevant Depositary; however, such cross-market transactions will require delivery of instructions to the relevant European international clearing system by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (European time). The relevant European international clearing system will, if the transaction meets its settlement requirements, deliver instructions to the Relevant Depositary to take action to effect final settlement on its behalf by delivering or receiving securities in DTC, and making or receiving payment in accordance with normal procedures for same day funds settlement applicable to DTC. CEDEL Participants and Euroclear Participants may not deliver instructions directly to the European Depositaries. DTC, which is a New York-chartered limited purpose trust company, performs services for its Participants ("DTC Participants"), some of which (and/or their representatives) own DTC. In accordance with its normal procedures, DTC is expected to record the positions held by each DTC Participant in the Book-Entry Certificates, whether held for its own account or as a nominee for another person. In general, beneficial ownership of Book-Entry Certificates will be subject to the rules, regulations and procedures governing DTC and DTC Participants as in effect from time to time. S-48 CEDEL is incorporated under the laws of Luxembourg as a professional depository. CEDEL holds securities for its participant organizations ("CEDEL Participants") and facilitates the clearance and settlement of securities transactions between CEDEL Participants through electronic book-entry changes in accounts of CEDEL Participants, thereby eliminating the need for physical movement of certificates. Transactions may be settled in CEDEL in any of 28 currencies, including United States dollars. CEDEL provides to its CEDEL Participants, among other things, services for safekeeping, administration, clearance and settlement of internationally traded securities and securities lending and borrowing. CEDEL interfaces with domestic markets in several countries. As a professional depository, CEDEL is subject to regulation by the Luxembourg Monetary Institute. CEDEL Participants are recognized financial institutions around the world, including underwriters, securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations. Indirect access to CEDEL is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a CEDEL Participant, either directly or indirectly. Euroclear was created in 1968 to hold securities for participants of Euroclear ("Euroclear Participants") and to clear and settle transactions between Euroclear Participants through simultaneous electronic book-entry delivery against payment, thereby eliminating the need for physical movement of certificates and any risk from lack of simultaneous transfers of securities and cash. Transactions may now be settled in any of 27 currencies, including United States dollars. Euroclear includes various other services, including securities lending and borrowing and interfaces with domestic markets in several countries generally similar to the arrangements for cross-market transfers with DTC described above. Euroclear is operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under contract with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the "Cooperative"). All operations are conducted by the Euroclear Operator, and all Euroclear Securities clearance accounts and Euroclear cash accounts are accounts with the Euroclear Operator, not the Cooperative. The Cooperative establishes policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants include banks (including central banks), securities brokers and dealers and other professional financial intermediaries. Indirect access to Euroclear is also available to other firms that clear through or maintain a custodial relationship with a Euroclear Participant, either directly or indirectly. The Euroclear Operator is the Belgian branch of a New York banking corporation which is a member bank of the Federal Reserve System. As such, it is regulated and examined by the Board of Governors of the Federal Reserve System and the New York State Banking Department, as well as the Belgian Banking Commission. Securities clearance accounts and cash accounts with the Euroclear operator are governed by the Terms and Conditions Governing Use of Euroclear and the related Operating Procedures of the Euroclear System and applicable Belgian law (collectively, the "Terms and Conditions"). The Terms and Conditions govern transfers of securities and cash within Euroclear, withdrawals of securities and cash from Euroclear, and receipts of payments with respect to securities in Euroclear. All securities in Euroclear are held on a fungible basis without attribution of specific certificates to specific securities clearance accounts. The Euroclear Operator acts under the Terms and Conditions only on behalf of Euroclear Participants, and has no record of or relationship with persons holding through Euroclear Participants. Distributions on the Book-Entry Certificates will be made on each Payment Date by the Trustee to DTC. DTC will be responsible for crediting the amount of such payments to the accounts of the applicable DTC Participants in accordance with DTC's normal procedures. Each DTC Participant will be responsible for disbursing such payment to the Beneficial Owners of the Book-Entry Certificates that it represents and to each Financial Intermediary for which it acts as agent. Each such Financial Intermediary will be responsible for disbursing funds to the Beneficial Owners of the Book-Entry Certificates that it represents. Under a book-entry format, Beneficial Owners of the Book-Entry Certificates may experience some delay in their receipt of payments, since such payments will be forwarded by the Trustee to Cede. Distributions with respect to Offered Certificates held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL Participants or Euroclear Participants in accordance with the relevant system's rules and procedures, to the extent received by the Relevant Depositary. Such distributions will be subject to tax reporting in accordance with relevant United States tax laws and regulations. Because DTC can only act on behalf of Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry Certificates, to persons or entities that do not participate in the Depository system, or otherwise take actions in respect of such Book-Entry Certificates, may be limited due to the lack of physical certificates for such Book-Entry Certificates. In addition, issuance of the Book-Entry Certificates in book-entry form may reduce the liquidity S-49 of such Certificates in the secondary market since certain potential investors may be unwilling to purchase Certificates for which they cannot obtain physical certificates. Monthly and annual reports on the Trust provided by the Trustee or the Master Servicer, as the case may be, to Cede, as nominee of DTC, may be made available to Beneficial Owners upon request, in accordance with the rules, regulations and procedures creating and affecting the Depository, and to the Financial Intermediaries to whose DTC accounts the Book-Entry Certificates of such Beneficial Owners are credited. DTC has advised the Trustee that, unless and until Definitive Certificates are issued, DTC will take any action permitted to be taken by the holders of the Book-Entry Certificates under the Pooling and Servicing Agreement only at the direction of one or more Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are credited, to the extent that such actions are taken on behalf of Financial Intermediaries whose holdings include such Book-Entry Certificates. CEDEL or the Euroclear Operator, as the case may be, will take any action permitted to be taken by an Owner under the Pooling and Servicing Agreement on behalf of a CEDEL Participant or Euroclear Participant only in accordance with its relevant rules and procedures and subject to the ability of the Relevant Depositary to effect such actions on its behalf through DTC. DTC may take actions, at the direction of the related Participants, with respect to some Offered Certificates which conflict with actions taken with respect to other Offered Certificates. Definitive Certificates will be issued to Beneficial Owners of the Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC or the Sponsor advises the Trustee in writing that DTC is no longer willing, qualified or able to discharge properly its responsibilities as a nominee and depository with respect to the Book-Entry Certificates and the Sponsor or the Trustee is unable to locate a qualified successor, (b) the Sponsor, at its sole option, elects to terminate a book-entry system through DTC or (c) DTC, at the direction of the Beneficial Owners representing a majority of the outstanding Percentage Interests of the Offered Certificates, advises the Trustee in writing that the continuation of a book-entry system through DTC (or a successor thereto) is no longer in the best interests of Beneficial Owners. Upon the occurrence of any of the events described in the immediately preceding paragraph, the Trustee will be required to notify all Beneficial Owners of the occurrence of such event and the availability through DTC of Definitive Certificates. Upon surrender by DTC of the global certificate or certificates representing the Book-Entry Certificates and instructions for re-registration, the Trustee will issue Definitive Certificates, at the Sponsor's expense and thereafter the Trustee will recognize the holders of such Definitive Certificates as Owners under the Pooling and Servicing Agreement. Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of Certificates among Participants of DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to perform such procedures and such procedures may be discontinued at any time. Neither the Sponsor, the Master Servicer nor the Trustee will have any liability for any actions taken by DTC or its nominee, Euroclear, or CEDEL, including, without limitation, actions for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Class A Certificates held by Euroclear, Cedel or Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Distributions Distributions on the Certificates are required to be made on each Payment Date, commencing on January 27, 1997, to the Owners on each Record Date in an amount equal to the product of such Owner's Percentage Interest and the amount distributed in respect of such Certificateholders' class of such Certificates on such Payment Date. See "Description of the Securities -- Distributions" in the Prospectus. S-50 Overcollateralization Provisions Overcollateralization Resulting from Cash Flow Structure. The Pooling and Servicing Agreement requires that, on each Payment Date, certain excess cash flows with respect to a Mortgage Loan Group, consisting of the difference between (i) the difference between (x) the interest which is collected on the Mortgage Loans in such Mortgage Loan Group during a Remittance Period (net of the Servicing Fee and Originator's Retained Yield) plus any Delinquency Advances and Compensating Interest and (y) the sum of (I) the interest which accrues on the related Offered Certificates during the related Accrual Period and (II) the premiums due to the Certificate Insurer with respect to the related Certificate Insurance Policy, and the Trustee's Fee (such difference, the "Total Monthly Excess Spread" with respect to the related Mortgage Loan Group), and (ii) any portion of the Total Monthly Excess Spread which is used to cover any shortfalls in Available Funds (provided, that this does not apply to any shortfall attributed to any Supplemental Interest Amount) on such Payment Date in the related Mortgage Loan Group, or in the other Mortgage Loan Group, or used to reimburse the Certificate Insurer on account of prior Insured Payments (such excess cash flows with respect to a Mortgage Loan Group being the "Net Monthly Excess Spread" with respect to such Mortgage Loan Group), be applied on such Payment Date as an accelerated payment of principal on the related Offered Certificates, but only to the limited extent hereafter described. This has the effect of accelerating the amortization of the Offered Certificates relative to the amortization of the Mortgage Loans in the related Mortgage Loan Group. To the extent that any Net Monthly Excess Spread is not so used, the Pooling and Servicing Agreement provides that it will be used to reimburse the Master Servicer with respect to any amounts owing to it, or otherwise applied as directed by the Owners of the Class R Certificates. With respect to any Mortgage Loan Group and Payment Date, the difference, if any, between (x) the aggregate principal balances of the Mortgage Loans in such Mortgage Loan Group as of the close of business on the last day of the preceding Remittance Period and (y) the aggregate Class A Certificate Principal Balance of the Offered Certificates issued in respect of the related Group as of such Payment Date (and following the making of all distributions on such Payment Date) is the "Subordinated Amount" with respect to such Mortgage Loan Group as of such Payment Date. Pursuant to the Pooling and Servicing Agreement relating to the Certificates, each Mortgage Loan Group's Net Monthly Excess Spread will be applied as an accelerated payment of principal on the related class or classes of Offered Certificates until the related Subordinated Amount has increased to the level required with respect to the related Mortgage Loan Group. Any amount of Net Monthly Excess Spread actually applied as an accelerated payment of principal is a "Subordination Increase Amount." The required level of the Subordinated Amount with respect to a Mortgage Loan Group and Payment Date is the "Specified Subordinated Amount" with respect to such Mortgage Loan Group and Payment Date. The Specified Subordinated Amount may, over time, decrease, or increase, subject to certain floors, caps and triggers. To the extent that any Mortgage Loan Group's Net Monthly Excess Spread is not required to be applied to the payment of a Subordination Increase Amount on the Offered Certificates relating to such Mortgage Loan Group because the Subordinated Amount with respect to such Mortgage Loan Group is equal to or greater than the then Specified Subordinated Amount with respect to such Mortgage Loan Group, such Net Monthly Excess Spread (together with the amount of any Subordination Reduction Amount, as described in the next paragraph) is permitted to be applied to the payment of Subordination Increase Amounts on the class or classes of Offered Certificates relating to the other Mortgage Loan Group, to the extent necessary to increase the Subordinated Amount with respect to such Mortgage Loan Group to the level of its respective Specified Subordinated Amount. In the event that the required level of the Specified Subordinated Amount with respect to a Mortgage Loan Group is permitted to decrease or "step down" on a Payment Date in the future, the Pooling and Servicing Agreement provides that a portion of the principal which would otherwise be distributed to the Owners of the class or classes of Offered Certificates on such Payment Date shall be distributed to, or otherwise applied as directed by, the Owners of the Class R Certificates on such Payment Date. This has the effect of decelerating the amortization of the Offered Certificates relative to the amortization of the Mortgage Loans in the related Mortgage Loan Group, and of reducing the related Subordinated Amount. With respect to any Mortgage Loan Group and Payment Date, the excess, if any, of (x) the Subordinated Amount that would apply to the related Mortgage Loan Group on such Payment Date after taking into account all distributions to be made on such Payment Date (except for any distributions of related Subordination Reduction Amounts as described in this sentence) over (y) the related Specified Subordinated Amount is the "Excess Subordinated Amount" with respect to such Mortgage Loan Group and Payment Date. If, on any Payment Date, the Excess Subordinated Amount is, or, after taking into account all other distributions to be made on such Payment Date S-51 would be, greater than zero (i.e., the Subordinated Amount is or would be greater than the related Specified Subordinated Amount), then any amounts relating to principal which would otherwise be distributed to the Owners of the related class or classes of Offered Certificates on such Payment Date shall instead be used to reimburse the Master Servicer for certain amounts owing to it, or otherwise applied as directed by, the Owners of the Class R Certificates (subject to certain other prior applications as described below under " -- Crosscollateralization Provisions") in an amount equal to the lesser of (x) the Excess Subordinated Amount and (y) the amount available for distribution on account of principal with respect to the related Offered Certificates on such Payment Date; such amount being the "Subordination Reduction Amount" with respect to the related Mortgage Loan Group for such Payment Date. As a technical matter regarding the cash flow structure of the Trust, Subordination Reduction Amounts may result even prior to the occurrence of any decrease or "step-down" in the related Specified Subordinated Amount. This is because the Owners of the related Offered Certificates will generally be entitled to receive 100% of collected principal, even though the related Class A Certificate Principal Balance will, following the accelerated amortization resulting from the application of the Net Monthly Excess Spread, represent less than 100% of the related Mortgage Loan Group's aggregate principal balance. In the absence of the provisions relating to Subordination Reduction Amounts, the foregoing may otherwise increase the Subordinated Amounts above their Specified Subordinated Amount requirements even without the further application of any Net Monthly Excess Spread. The Pooling and Servicing Agreement provides that, on any Payment Date, all amounts collected on account of principal (other than any such amount applied to the payment of a Subordination Reduction Amount) with respect to a Mortgage Loan Group during the prior Remittance Period will be distributed to the Owners of the related class of Offered Certificates on such Payment Date. If any Mortgage Loan became a Liquidated Mortgage Loan during such prior Remittance Period, the Net Liquidation Proceeds related thereto and allocated to principal may be less than the principal balance of the related Mortgage Loan; the amount of any such insufficiency is a "Realized Loss." In addition, the Pooling and Servicing Agreement provides that the principal balance of any Mortgage Loan which becomes a Liquidated Mortgage Loan shall thenceforth equal zero. The Pooling and Servicing Agreement does not contain any rule which requires that the amount of any Realized Loss be distributed to the Owners of the related Offered Certificates on the Payment Date which immediately follows the event of loss, i.e., the Pooling and Servicing Agreement does not require the current recovery of losses. However, the occurrence of a Realized Loss will reduce the Subordinated Amount with respect to the related Mortgage Loan Group, which, to the extent that such reduction causes the Subordinated Amount to be less than the related Specified Subordinated Amount applicable to the related Payment Date, will require the payment of a Subordination Increase Amount on such Payment Date (or, if insufficient funds are available on such Payment Date, or subsequent Payment Dates, until the Subordinated Amount equals the related Specified Subordinated Amount). The effect of the foregoing is to allocate losses to the Owners of the Class R Certificates by reducing, or eliminating entirely, payment of Monthly Excess Spread and of Subordination Reduction Amounts which such Owners would otherwise receive. Overcollateralization and the Certificate Insurance Policy. The Pooling and Servicing Agreement defines a "Subordination Deficit" with respect to a Mortgage Loan Group and Payment Date to be the amount, if any, by which (x) the aggregate Class A Certificate Principal Balance of the Offered Certificates issued in respect of the related Group as of such Payment Date, and following the making of all distributions to be made on such Payment Date (except for any payment to be made as to principal from proceeds of the Certificate Insurance Policy), exceeds (y) the aggregate principal balance of the Mortgage Loans in the related Mortgage Loan Group as of the close of business on the last day of the preceding Remittance Period. The Pooling and Servicing Agreement requires the Trustee to make a claim for an Insured Payment under the Certificate Insurance Policy not later than the third Business Day prior to any Payment Date as to which the Trustee has determined that a Subordination Deficit will occur for the purpose of applying the proceeds of such Insured Payment as a payment of principal to the Owners of the Offered Certificates on such Payment Date. The Certificate Insurance Policy is thus similar to the subordination provisions described above insofar as the Certificate Insurance Policy guarantees ultimate, rather than current, payment of the amounts of any Realized Losses to the Owners of the related Offered Certificates. Investors in the Offered Certificates should realize that, under extreme loss or delinquency scenarios applicable to the related Mortgage Loan Pool, they may temporarily receive no distributions of principal. Crosscollateralization Provisions On each Payment Date, an amount equal to the sum of (x) the Total Monthly Excess Spread with respect to each Mortgage Loan Group and Payment Date plus (y) any Subordination Reduction Amount with respect to such Mortgage Loan Group and Payment Date (such amount being the "Total Monthly Excess Cashflow" with respect to such Mortgage Loan Group and Payment Date) with respect to each Mortgage S-52 Loan Group will be required to be applied in the following order of priority: (i) such amount shall be used to fund any shortfall on such Payment Date with respect to the related Mortgage Loan Group and equal to the difference, if any, between (x) the Insured Distribution Amount for the related Mortgage Loan Group for such Payment Date and (y) the Available Funds with respect to the related Mortgage Loan Group for such Payment Date (the amount of such difference being equal to an "Available Funds Shortfall" with respect to the related Mortgage Loan Group); (ii) any remaining amount after the application described in (i) above shall be used to fund any Available Funds Shortfall with respect to the other Group for such Payment Date; (iii) any portion of the Total Monthly Excess Cashflow with respect to such Mortgage Loan Group remaining after the applications described in clause (i) and (ii) above shall be paid to the Certificate Insurer in respect of amounts owed on account of any Insured Payments theretofore made with respect to the related Mortgage Loan Group (any such amount so owed to the Certificate Insurer and not theretofore paid, together with accrued interest thereon, the "Insurer Reimbursable Amount" with respect to the related Mortgage Loan Group); and (iv) any portion of the Total Monthly Excess Cashflow with respect to such Mortgage Loan Group remaining after the application described in clauses (i), (ii) and (iii) above shall be paid to the Certificate Insurer in respect of any Insurer Reimbursable Amount with respect to the other Mortgage Loan Group. The amount, if any, of the Total Monthly Excess Cashflow with respect to a Mortgage Loan Group on a Payment Date remaining after such applications is the "Net Monthly Excess Cashflow" with respect to such Mortgage Loan Group for such Payment Date; such amount is required to be applied in the following order of priority on such Payment Date: (i) such amount shall be used to fund the payment of any required Subordination Increase Amount with respect to the related Mortgage Loan Group as a portion of the distribution of the Class A Principal Distribution Amount on such Payment Date; (ii) any portion of the Net Monthly Excess Cashflow remaining after the application described in clause (i) above shall be used to make any required Subordination Increase Amount with respect to the other Mortgage Loan Group; and (iii) any remaining Net Monthly Cashflow may then be used to reimburse the Master Servicer for certain amounts owing to it, or may be otherwise applied as directed by the Owners of the Class R Certificates. Credit Enhancement Does Not Apply to Prepayment Risk or Basis Risk In general, the protection afforded by the subordination provisions and by the Certificate Insurance Policy is protection for credit risk and not for prepayment risk or basis risk (the risk that changes in the value of the indices on the Mortgage Loans will not match the changes in the value of the index applicable to calculate the interest on the Certificates). The subordination provisions may not be adjusted, nor may a claim be made under the Certificate Insurance Policy to guarantee or insure that any particular rate of prepayment is experienced by the Trust. Offered Class Distributions and Insured Payments to the Owners of the Offered Certificates No later than the third Business Day prior to each Payment Date the Trustee will be required to determine the amount for each Mortgage Loan Group (the "Group I Available Funds" with respect to the Class A-1 Certificates and the "Group II Available Funds" with respect to the Class A-2 Certificates) to be on deposit in the Distribution Account on such Payment Date (after taking into account any amounts transferred as a result of the cross-collateralization mechanics described above). If the Group I Insured Distribution Amount for any Payment Date exceeds the related Group I Available Funds for such Payment Date, the Trustee will be required to draw the amount of such insufficiency from the Certificate Insurer under the Certificate Insurance Policy. Similarly, if the Group II Insured Distribution Amount for any Payment Date exceeds the Group II Available Funds for such Payment Date, the Trustee S-53 will be required to draw the amount of the insufficiency from the Certificate Insurer under the Certificate Insurance Policy. The Pooling and Servicing Agreement provides that amounts which cannot be distributed to the Owners of the Certificates as a result of proceedings under the United States Bankruptcy Code or similar insolvency laws will not be considered in determining the amount of Available Funds with respect to any Payment Date. On each Payment Date, and following the making by the Trustee of all allocations, transfers and deposits heretofore described, from amounts (including any related Insured Payment) then on deposit in the Distribution Account, the Trustee will be required to distribute to the Owners of each class of Offered Certificates the Class A Distribution Amount with respect to such class for such Payment Date. Calculation of LIBOR On the second business day preceding each Payment Date or, in the case of the first Payment Date, on the second business day preceding the Closing Date (each such date, an "Interest Determination Date"), the Trustee will determine the London interbank offered rate for one-month U.S. dollar deposits ("LIBOR") for the next Accrual Period for the Class A-1 and the A-2 Certificates on the basis of the offered rates of the Reference Banks for one-month U.S. dollar deposits, as such rates appear on the Reuters Screen LIBO Page, as of 11:00 a.m. (London time) on such Interest Determination Date. As used in this section, "business day" means a day on which banks are open for dealing in foreign currency and exchange in London and New York City; "Reuters Screen LIBO page" means the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace the LIBO page on that service for the purpose of displaying London interbank offered rates of major banks); and "Reference Banks" means leading banks selected as the Trustee and engaged in transactions in Eurodollar deposits in the international Eurocurrency market (i) with an established place of business in London, (ii) whose quotations appear on the Reuters Screen LIBO Page on the Interest Determination Date in question, (iii) which have been designated as such by the Trustee and (iv) not controlling, controlled by, or be under common control with, the Sponsor. On each Interest Determination Date, LIBOR for the related Accrual Period for the Class A-1 and the Class A-2 Certificates will be established by the Trustee as follows: (a) If on such Interest Determination Date two or more Reference Banks provides such offered quotations, LIBOR for the related Accrual Period for the Class A-1 and the Class A-2 Certificates shall be the arithmetic mean of such offered quotations (rounded upwards if necessary to the nearest whole multiple of 1/16%). (b) If on such Interest Determination Date fewer than two Reference Banks provide such offered quotations, LIBOR for the related Accrual Period for the Class A-1 and the Class A-2 Certificates shall be the higher of (x) LIBOR as determined on the previous Interest Determination Date and (y) the Reserve Interest Rate. The "Reserve Interest Rate" shall be the rate per annum that the Trustee determines to be either (i) the arithmetic mean (rounded upwards if necessary to the nearest whole multiple of 1/16%) of the one-month U.S. dollar lending rates which New York City banks selected by the Trustee are quoting on the relevant Interest Determination Date to the principal London offices of leading banks in the London interbank market or, in the event that the Trustee can determine no such arithmetic mean, (ii) the lowest one-month U.S. dollar lending rate which New York City banks selected by the Trustee are quoting on such Interest Determination Date to leading European banks. The establishment of LIBOR on each Interest Determination Date by the Trustee and the Trustee's calculation of the rate of interest applicable to the Class A-1 and the Class A-2 Certificates for the related Accrual Period shall (in the absence of manifest error) be final and binding. Each such rate of interest may be obtained by telephoning the Trustee at 1-800-735-7777. Certain Activities The Trust has not and will not: (i) issue securities (except for the Certificates); (ii) borrow money; (iii) make loans; (iv) invest in securities for the purpose of exercising control; (v) underwrite securities; (vi) except as provided in the Pooling and Servicing Agreement, engage in the purchase and sale (or turnover) of investments; (vii) offer securities in exchange for property (except Certificates for the Mortgage Loans); or (viii) repurchase or otherwise reacquire its securities. See "Description of the Securities -- Reports To The Securityholders" in the Prospectus for information regarding reports to the Owners. S-54 THE CERTIFICATE INSURANCE POLICY The following information has been supplied by the Certificate Insurer for inclusion in this Prospectus Supplement. The Sponsor will obtain a Certificate Insurance Policy, issued by the Certificate Insurer, in favor of the Owners of the Offered Certificates. The Certificate Insurance Policy provides for 100% coverage of the Insured Distribution Amount. The Certificate Insurance Policy unconditionally guarantees the timely payment of interest due and the ultimate payment of principal on the Class A Certificates. The Certificate Insurer is required to make Insured Payments to the Trustee as paying agent on the later of the Payment Date or on the business day next following the day on which the Certificate Insurer shall have received telephonic or telegraphic notice, subsequently confirmed in writing, or written notice by registered or certified mail, from the Trustee that an Insured Payment is due. The Pooling and Servicing Agreement will provide that the "Available Funds" do not include Insured Payments and do not include any amounts that can be distributed to the Owners of any Offered Certificates by the Trustee as a result of final, non-appealable proceedings under the United States Bankruptcy Code. In addition, the Certificate Insurance Policy will provide for payment of the amount (a "Preference Amount") of any distributions in respect of principal or interest previously paid to a Class A Certificateholder that are subsequently recovered from such Certificateholder prior to the expiration date of the Certificate Insurance Policy pursuant to a final, nonappealable order (a "Final Order") of a court of competent jurisdiction under the United States Bankruptcy Code. Any such payments would be made under the Certificate Insurance Policy on the second business day following receipt by the Certificate Insurer of a certified copy of such Final Order, assignment to the Certificate Insurer of such Certificateholder's rights and claims with respect to such Preference Amount and appointment of the Certificate Insurer as such Certificateholder's agent in respect of such Preference Amount. No such Certificateholder shall be entitled to reimbursement for any payment avoided as a preference as to which the Certificate Insurer previously has made a payment under the Certificate Insurance Policy, nor is the Certificate Insurer obligated to make any payment in respect of any Preference Amount which represents a payment of the principal amount of the Class A Certificates prior to the time the Certificate Insurer otherwise would have been required to make a payment in respect of such principal. The Certificate Insurance Policy is non-cancelable. THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW. The Certificate Insurer's obligation under the Certificate Insurance Policy will be discharged to the extent that funds are received by the Trustee for distribution to the Class A Certificateholders, whether or not such funds are properly distributed by the Trustee. For purposes of the Certificate Insurance Policy, Certificateholder does not include the Trust, the Master Servicer or the Sponsor. The Certificate Insurance Policy expires and terminates without any action on the part of the Certificate Insurer or any other person on the date that is one year and one day following the date on which the Class A Certificates have been paid in full. The Certificate Insurance Policy does not guarantee to the owners of the Offered Certificates any specific rate of prepayments of principal of the Mortgage Loans. Also, the Certificate Insurance Policy does not guarantee the payment of any Supplemental Interest Amount. Pursuant to the Pooling and Servicing Agreement, the Certificate Insurer is subrogated to the rights of the Owners of the Offered Certificates to the extent of any such payment under the Certificate Insurance Policy. THE CERTIFICATE INSURER General S-55 Financial Guaranty Insurance Company, the Certificate Insurer, a New York stock insurance corporation, is a monoline financial guaranty insurance company which, since January 1984, has been a leading insurer of bonds issued by municipal governmental subdivisions and agencies thereof. The Certificate Insurer also insures a variety of non-municipal structured debt obligations and pass-through securities. The Certificate Insurer is authorized to write insurance in all 50 states and the District of Columbia and is also authorized to carry on general insurance business in the United Kingdom and to write credit and guaranty insurance in France. The Certificate Insurer is a wholly-owned subsidiary of FGIC Corporation, a Delaware holding company. FGIC Corporation is a subsidiary of General Electric Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is obligated to pay the debts of or the claims of the Certificate Insurer. The Certificate Insurer and its holding company, FGIC Corporation, are subject to regulation by the State of New York Insurance Department and by each other jurisdiction in which the Certificate Insurer is licensed to write insurance. These regulations vary from jurisdiction to jurisdiction, but generally require insurance holding companies and their insurance subsidiaries to register and file certain reports, including information concerning their capital structure, ownership and financial condition and require prior approval by the insurance department of their state of domicile of changes in control, of dividends and other intercorporate transfers of assets and of transactions between insurance companies, their parents and affiliates. The Certificate Insurer is required to file quarterly and annual statutory financial statements and is subject to statutory restrictions concerning the types and quality of investments, the use of policy forms, premium rates and the size of risk that it may insure, subject to reinsurance. Additionally, the Certificate Insurer is subject to triennial audits by the State of New York Insurance Department. The Certificate Insurer considers its role in providing insurance to be credit enhancement rather than credit substitution. The Certificate Insurer only insures securities that it considers to be of investment grade quality. With respect to each category of obligations considered for insurance, the Certificate Insurer has established and maintains its own underwriting standards that are based on those aspects of credit quality that the Certificate Insurer deems important for the category and that take into account criteria established for the category typically used by rating agencies. Credit criteria for evaluating securities include economic and social trends, debt management, financial management and legal and administrative factors, the adequacy of anticipated cash flow, including the historical and expected performance of assets pledged for payment of securities under varying economic scenarios, underlying levels of protection such as insurance or overcollateralization, and, particularly in the case of long-term municipal securities, the importance of the project being financed. The Certificate Insurer also reviews the security features and reserves created by the financing documentation, as well as the financial and other covenants imposed upon the credit backing the issue. In connection with underwriting new issues, the Certificate Insurer sometimes requires, as a condition to insuring an issue, that collateral be pledged or, in some instances, that a third-party guarantee be provided for a term of the insured obligation by a party of acceptable credit quality obligated to make payment prior to any payment by the Certificate Insurer. Insurance written by the Certificate Insurer insures the full and timely payment of interest and principal when due on insured debt securities and timely interest and ultimate principal payments due in respect of pass-through securities such as the Offered Certificates. If the issuer of a security insured by the Certificate Insurer defaults on its obligations to pay such debt service or, in the case of a pass-through security, available funds are insufficient to pay the insured amounts, the Certificate Insurer will make scheduled insured payments, without regard to any acceleration of the securities which may have occurred, and will be subrogated to the rights of security holders to the extent of its payments. The claims paying ability of the Certificate Insurer is rated Aaa, AAA and AAA by Moody's, Standard & Poor's and Fitch, respectively. In consideration for issuing its insurance, the Certificate Insurer receives a premium which is generally paid in full upon issuance of the policy or on an annual, semi-annual or monthly basis. The premium rates charged depend principally on the credit strength of the securities as judged by the Certificate Insurer according to its internal credit rating system and the type of issue. As of September 30, 1996 and December 31, 1995 and 1994 the Certificate Insurer had written directly or assumed through reinsurance, guaranties of approximately $197.8 billion, $180.0 billion and 160.2 billion par value of securities, respectively (of which approximately 86 percent, 88 percent and 89 percent, respectively, constituted guaranties of municipal bonds), for which it had collected gross premiums of approximately $2.01 billion, $1.95 billion S-56 and $1.78 billion respectively. As of September 30, 1996, the Certificate Insurer had reinsured approximately 18 percent of the risks it had written, 34 percent through quota share reinsurance and 66 percent through facultative arrangements. Capitalization The following table sets forth the capitalization of the Certificate Insurer as of December 31, 1994 and December 31, 1995 and September 30, 1996, respectively, on the basis of generally accepted accounting principles. No material adverse change in the capitalization of the Certificate Insurer has occurred since September 30, 1996.
(Unaudited) December 31, December 31, September 30, 1994 1995 1996 (in Millions) (in Millions) (in Millions) ------------- -------------- ------------- Unearned Premiums $ 757 $728 $ 685 Other Liabilities 261 304 332 Stockholder's Equity Common Stock 15 15 15 Additional Paid-In Capital 334 334 334 Unrealized gains (losses) (42) 64 12 Foreign currency translation adjustment (1) (2) (2) Retained Earnings 974 1,137 1,273 --- ----- ----- Total Stockholder's Equity 1,280 1,548 1,632 ----- ----- ----- Total Liabilities and Stockholders Equity $2,298 $2,580 $2,649 ===== ===== =====
For further financial information concerning the Certificate Insurer, see the audited financial statements of the Certificate Insurer included as Appendix A and the unaudited interim financial statements of the Certificate Insurer included as Appendix B of this Prospectus Supplement. Copies of the Certificate Insurer's quarterly and annual statutory statements filed by the Certificate Insurer with the New York Insurance Department are available upon request to Financial Guaranty Insurance Company, 115 Broadway, New York, New York 10006, Attention: Corporate Communications Department, the Certificate Insurer's telephone number is (212) 312-3000. The Certificate Insurer does not accept any responsibility for the accuracy or completeness of this Prospectus or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of information regarding the Certificate Insurer and the Certificate Insurance Policy set forth under the headings "The Certificate Insurer" and "The Certificate Insurance Policy" herein and in Appendix A and Appendix B. An indemnification agreement among the Certificate Insurer, the Sponsor, the Seller and the Underwriters provide that each of the parties to such agreement will indemnify each other for certain liabilities under the 1933 Act. THE POOLING AND SERVICING AGREEMENT In addition to the provisions of the Pooling and Servicing Agreement summarized elsewhere in this Prospectus Supplement and the Prospectus, there is set forth below a summary of certain other provisions of the Pooling and Servicing Agreement. S-57 Formation of the Trust The Trust will be created and established pursuant to the Pooling and Servicing Agreement on the Closing Date. On such date, the Sponsor will cause the Trust to acquire the Mortgage Loans, and the Trust will issue the Offered Certificates to the Owners thereof. The property of the Trust shall include all money, instruments and other property to the extent such money, instruments and other property are subject or intended to be held in trust for the benefit of the Owners, and all proceeds thereof, including, without limitation, (i) the Mortgage Loans, (ii) such amounts, including Eligible Investments, as from time to time may be held by the Trustee in the Distribution Account and by the Master Servicer in the Principal and Interest Account (except as otherwise provided in the Pooling and Servicing Agreement), each to be created pursuant to the Pooling and Servicing Agreement, (iii) any Mortgaged Property, the ownership of which has been effected on behalf of the Trust as a result of foreclosure or acceptance by the Master Servicer of a deed in lieu of foreclosure and that has not been withdrawn from the Trust, (iv) any insurance policies relating to the Mortgage Loans and any rights of the Sponsor or the affiliated Originators under any insurance policies, and (v) Net Liquidation Proceeds with respect to any Liquidated Loan (collectively, the "Trust Estate"). The Pooling and Servicing Agreement also establishes an account, the "Supplemental Interest Account," which is held in trust by the Trustee, but does not constitute a part of the Trust. The Supplemental Interest Account will hold certain amounts and other property relating to the funding of Supplemental Interest Amounts, if any. "Supplemental Interest Amounts" consist of "Class A-1 Supplemental Interest Amounts" and "Class A-2 Supplemental Interest Amounts." "Class A-1 Supplemental Interest Amounts" are payments due on any Payment Date which result from any shortfall between Class A-1 Certificate interest calculated at the Class A-1 Formula Pass-Through Rate, and such interest calculated at the Class A-1 Available Funds Pass-Through Rate. "Class A-2 Supplemental Interests Amounts" are payments due on any Payment Date which result from any shortfall between Class A-2 Certificate interest calculated at the Class A-2 Formula Pass-Through Rate, and such interest calculated at the Class A-2 Available Funds Pass-Through Rate. The Trustee will hold the Certificate Insurance Policy with respect to the Offered Certificates. Sale of Mortgage Loans Not later than the Closing Date the Sponsor will cause the Originators to transfer the Mortgage Loans pursuant to one or more Master Mortgage Loan Transfer Agreements between the Originators and the Sponsor (the "Master Transfer Agreements"). In the Master Transfer Agreements the Originators will make certain representations and warranties; the Sponsor will assign its rights to enforce such representations and warranties to the Trustee. Pursuant to the Pooling and Servicing Agreement, the Sponsor on the Closing Date will cause the Trust to acquire all right, title and interest of the Originators in each Mortgage Loan listed on the schedule delivered to the Trustee on the Closing Date (the "Schedule of Mortgage Loans") and all their right, title and interest in all principal collected and all interest due on each such Mortgage Loan on or after the Cut-Off Date. In connection with the sale of the Mortgage Loans on the Closing Date, the Originators will be required to deliver to the Trustee a file (a "Mortgage Loan File") consisting of, among other things, (i) the original Notes or certified copies thereof, endorsed by the Originator thereof in blank or to the order of the holder, (ii) originals of all intervening assignments, showing a complete chain of title from origination to the applicable Originators, if any, including warehousing assignments, with evidence of recording thereon, (iii) originals of all assumption and modification agreements if any, and, unless such Mortgage Loan is covered by a counsel's opinion as described in the next paragraph, (iv) either: (a) the original Mortgage, with evidence of recording thereon, (b) a true and accurate copy of the Mortgage where the original has been transmitted for recording, until such time as the original is returned by the public recording office or (c) a copy of the Mortgage certified by the public recording office in those instances where the original recorded Mortgage has been lost. The Trustee will agree, for the benefit of the Owners, to review each such file within 90 days after the Closing Date to ascertain that all required documents (or certified copies of documents) have been executed and received. The Pooling and Servicing Agreement generally requires that there be prepared and recorded, within 75 business days of the Closing Date (or, if original recording information is unavailable, within such later period as is permitted by S-58 the Pooling and Servicing Agreement) assignments of the Mortgages from the Originators to the Trustee, in the appropriate jurisdictions in which such recordation is necessary to perfect the lien thereof as against creditors of or purchasers from the Originators; provided, however, that such requirements may be waived by the Certificate Insurer under certain circumstances set forth in the Pooling and Servicing Agreement. Governing Law The Pooling and Servicing Agreement and each Certificate will be construed in accordance with and governed by the laws of the State of New York applicable to agreements made and to be performed therein. Termination of the Trust The Pooling and Servicing Agreement will provide that the Trust will terminate upon the earlier of (i) the payment to the Owners of all Certificates from amounts other than those available under the Certificate Insurance Policy of all amounts required to be paid such Owners upon the later to occur of (a) the final payment or other liquidation (or any advance made with respect thereto) of the last Mortgage Loan or (b) the disposition of all property acquired in respect of any Mortgage Loan remaining in the Trust Estate, or (ii) any time when a Qualified Liquidation of the Trust Estate is effected. Optional Termination By the Master Servicer. At its option, the Master Servicer acting directly or through one or more affiliates may determine to purchase from the Trust all of the Mortgage Loans and other property then held by the Trust, and thereby effect early retirement of the Certificates, on any Remittance Date on and after the Clean-up Call Date. Upon Loss of REMIC Status. Following a final determination by the Internal Revenue Service, or by a court of competent jurisdiction, in each case from which no appeal is taken within the permitted time for such appeal, or if any appeal is taken, following a final determination of such appeal from which no further appeal can be taken to the effect that the Trust does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the Code (the "Final Determination"), at any time on or after the date which is 30 calendar days following such Final Determination, (i) the Owners of a majority in Percentage Interest represented by the Offered Certificates then outstanding may direct the Trustee to adopt a plan of complete liquidation with respect to the Trust and (ii) the Certificate Insurer may notify the Trustee of the Certificate Insurer's determination to purchase from the Trust all Mortgage Loans and other property acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the Trust, and thereby effect the early retirement of the Certificates. Upon receipt of such notice or direction, the Trustee will be required to notify the Owners of the Class R Certificates of the determination of the Certificate Insurer or the Owners of the Offered Certificates to liquidate (the "Termination Notice"). The Owners of a majority of the Percentage Interest represented by the Class R Certificates then outstanding may, within 60 days from the date of receipt of the Termination Notice (the "Purchase Option Period"), at their option, purchase from the Trust all Mortgage Loans and all property theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the Trust as of the date of such purchase plus one month's interest on such amount at the weighted average Pass-Through Rate. If, during the Purchase Option Period, the Owners of the Class R Certificates have not exercised the option described above, then upon the expiration of the Purchase Option Period the Certificate Insurer may purchase the Trust Estate within 60 days after the expiration of the Purchase Option Period or the Trustee will sell the Mortgage Loans and distribute the proceeds of the liquidation thereof. Following a Final Determination, the Owners of a majority of the Percentage Interest represented by the Class R Certificates then outstanding may, at their option (and upon delivery to the Trustee and the Certificate Insurer of an opinion of counsel experienced in Federal income tax matters to the effect that the effect of the Final Determination is to substantially increase the probability that the gross income of the Trust will be subject to federal taxation), purchase from the Trust all Mortgage Loans and all property theretofore acquired by foreclosure, deed in lieu of foreclosure, or otherwise in respect of any Mortgage Loan then remaining in the Trust Estate at a purchase price equal to the aggregate Class A Certificate Principal Balance as of the date of such purchase plus interest accrued on the Offered Certificates since the prior Payment Date at the weighted average Pass-Through Rate net of the Servicing Fee and less any amounts owed to the Master Servicer. The Pooling and Servicing Agreement provides that the foregoing opinion shall be deemed S-59 satisfactory unless a majority of the Percentage Interest of the Offered Certificates give the Owners of the Class R Certificates notice that such opinion is not satisfactory within thirty days after receipt of such opinion. CERTAIN FEDERAL INCOME TAX CONSEQUENCES The following discussion of certain of the material anticipated federal income tax consequences of the purchase, ownership and disposition of the Offered Certificates is to be considered only in connection with "Certain Federal Income Tax Consequences" in the Prospectus. The discussion herein and in the Prospectus is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. The discussion below and in the Prospectus does not purport to deal with all federal tax consequences applicable to all categories of investors, some of which may be subject to special rules. Investors should consult their own tax advisors in determining the federal, state, local and any other tax consequences to them of the purchase, ownership and disposition of the Offered Certificates. REMIC Elections The Trustee will cause one or more REMIC elections to be made with respect to certain specified assets of the Trust for federal income tax purposes. Qualification as a REMIC requires ongoing compliance with certain conditions. Dewey Ballantine, special tax counsel, will advise that, in its opinion, for federal income tax purposes, assuming the REMIC elections are made and compliance with the Pooling and Servicing Agreement. The Trust will be treated as a REMIC for federal income tax purposes. Each of the Class A Certificates and the related rights to receive Supplemental Interest Payments will be comprised of (i) a "regular interest" in a REMIC, which will be treated as a debt instrument of the Trust for federal income tax purposes and (ii) the right to receive Supplemental Interest Payments having the characteristics described below. For federal income tax purposes, regular interests in a REMIC are treated as debt instruments issued by the REMIC on the date on which those interests are created, and not as ownership interests in the REMIC or its assets. Owners of Offered Certificates that otherwise report income under a cash method of accounting will be required to report income with respect to such Offered Certificates under an accrual method. The Offered Certificates may be issued with "original issue discount" for federal income tax purposes. The prepayment assumption that will be used in determining the rate of accrual of original issue discount on the Offered Certificates is 100% of the "Prepayment Assumption". See "Payment and Yield Considerations -- Projected Prepayments and Yields for Offered Certificates." No representation is made that any of the Mortgage Loans will prepay at such rates or any other rate. See "Payment and Yield Considerations -- Projected Prepayments and Yields for Offered Certificates" herein and "Certain Federal Income Tax Consequences -- Discount and Premium" in the Prospectus. Special Tax Attributes The Certificates possess certain special tax attributes by virtue of the REMIC provisions of the Code. See "Certain Federal Income Tax Consequences - -- REMIC Securities -- Special Tax Attributes" in the Prospectus. The Small Business Job Protection Act of 1996 repeals the bad debt reserve method of accounting for mutual savings banks and domestic building and loan associations for tax years beginning after December 31, 1995. As a result, Section 593(d) of the Code is no longer applicable to treat REMIC regular interests, including the Certificates, as "qualifying real property loans." Supplemental Interest Amounts The Beneficial Owners of the Certificates and the related rights to receive Supplemental Interest Amounts will be treated for tax purposes as owning two separate investments: (i) the respective Class A Certificates without the right to receive Supplemental Interest Amounts and (ii) the right to receive the Supplemental Interest Amounts. The Owners of the respective Class A Certificates must allocate the purchase price of their Certificates between these two investments based on their relative fair market values. The purchase price allocated to the first investment will be the issue price of the respective Class A Certificates for calculating accruals of original issue discount. See "Certain Federal Income Tax Consequences -- Discount and Premium" in the Prospectus. A Beneficial Owner of a Certificate and the related rights to receive Supplemental Interest Amounts will be treated for federal income tax purposes as having entered into a notional principal contract on the date that it purchases S-60 its Certificate. Treasury Regulations under Section 446 of the Code relating to notional principal contracts (the "Notional Principal Contract Regulations") provide that taxpayers, regardless of their method of accounting, generally must recognize the ratable daily portion of a periodic payment for the taxable year to which that portion relates. Any Supplemental Interest Amounts will be periodic payments. Income with respect to periodic payments under a notional principal contract for a taxable year should constitute ordinary income. The purchase price allocated to the right to receive the related Supplemental Interest Amounts will be treated as a nonperiodic payment under the Notional Principal Contract Regulations. Such a nonperiodic payment may be amortized using several methods, including the level payment method described in the Notional Principal Contract Regulations. The right to receive the Supplemental Interest Amounts will not constitute: (i) a "real estate asset" within the meaning of section 858(c)(5)(A) of the Internal Revenue Code (the "Code") if held by a real estate investment trust; (ii) a "qualified mortgage" within the meaning of section 860G(a)(3) of the Code or a "permitted investment" within the meaning of section 860G(a)(5) of the code if held by a REMIC; or (iii) assets described in section 7701(a)(19)(C)(xi) of the Code if held by a thrift. Moreover, other special rules may apply to certain investors, including dealers in securities and dealers in notional principal contracts. Taxation of Foreign Investors In general, foreign investors will not be subject to U.S. withholding on income from the Supplemental Interest Amounts. See "Certain Federal Income Tax Consequences -- Foreign Investors -- Grantor Trust Securities and REMIC Regular Securities" in the Prospectus. ERISA CONSIDERATIONS Section 406 of ERISA and Section 4975 of the Code prohibit a pension, profit sharing or other employee benefit plan (the "Plans") from engaging in certain transactions involving "plan assets" with persons that are "parties in interest" under ERISA or "disqualified persons" under the Code with respect to the Plan unless a statutory or administrative exemption applies to the transaction. ERISA also imposes certain duties on persons who are fiduciaries of Plans subject to ERISA. A violation of these "prohibited transaction" rules may generate excise tax and other liabilities under ERISA and the Code for such persons. In addition, investments by Plans are subject to ERISA's general fiduciary requirements, including the requirement of investment prudence and diversification and the requirement that a Plan's investments be made in accordance with the documents governing the Plan. The United States Department of Labor (the "DOL") has issued a regulation (the "Plan Asset Regulation") describing what constitutes the assets of a Plan when the Plan acquires an equity interest in another entity. The Plan Asset Regulation states that, unless an exception described in the regulation is applicable, the underlying assets of a corporation, partnership or trust in which a Plan makes an equity investment will be considered, for purposes of ERISA, to be assets of the investing Plan. Pursuant to the Plan Asset Regulation, if the assets of the Trust were deemed to be plan assets by reason of a Plan's investment in any Offered Certificates, such plan assets would include an undivided interest in any assets held in such Trust. Therefore, in the absence of an exemption, the purchase, sale or holding of any Offered Certificate by a Plan (including certain individual retirement arrangements) subject to Section 406 of ERISA or Section 4975 of the Code might result in prohibited transactions and the imposition of excise taxes and civil penalties. The DOL has issued to the Underwriters individual prohibited transaction exemptions, (the "Exemptions"), which generally exempt from the application of the prohibited transaction provisions of Section 406(a), Section 406(b)(1), Section 406(b)(2) and Section 407(a) of ERISA and the excise taxes imposed pursuant to Sections 4975(a) and (b) of the Code, certain transactions with respect to the initial purchase, the holding and the subsequent resale by Plans of certificates in pass-through trusts that consist of certain receivables, loans and other obligations that meet the conditions and requirements of the Exemptions. The loans covered by the Exemptions include mortgage loans such as the Mortgage Loans. S-61 Among the conditions that must be satisfied for the Exemptions to apply are the following: (1) the acquisition of the certificates by a Plan is on terms (including the price for the certificates) that are at least as favorable to the Plan as they would be in an arm's-length transaction with an unrelated party; (2) the rights and interests evidenced by the certificates acquired by the Plan are not subordinated to the rights and interests evidenced by other certificates of the trust; (3) the certificates acquired by the Plan have received a rating at the time of such acquisition that is one of the three highest generic rating categories from either Standard & Poor's Corporation ("Standard & Poor's"), Moody's Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co. ("D&P") or Fitch Investors Service, Inc. ("Fitch"); (4) the Trustee is not an affiliate of any other member of the Restricted Group (as defined below); (5) the sum of all payments made to and retained by the Underwriters in connection with the distribution of the certificates represents not more than reasonable compensation for underwriting the certificates; the sum of all payments made to and retained by the Originator and the Sponsor pursuant to the assignment of the loans to the Trust Estate represents not more than the fair market value of such loans; the sum of all payments made to and retained by any Servicer represents not more than reasonable compensation for such person's services under the Pooling and Servicing Agreement and reimbursement of such person's reasonable expenses in connection therewith; and (6) the Plan investing in the certificates is an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the Commission under the Securities Act of 1933. The Trust Estate must also meet the following requirements: (i) the corpus of the Trust Estate must consist solely of assets of the type that have been included in other investment pools; (ii) certificates in such other investment pools must have been rated in one of the three highest rating categories of Standard & Poor's, Moody's, Fitch or D&P for at least one year prior to the Plan's acquisition of certificates; and (iii) certificates evidencing interests in such other investment pools must have been purchased by investors other than Plans for at least one year prior to the Plan's acquisition of certificates. Moreover, the Exemptions provide relief from certain self-dealing/conflict of interest prohibited transactions that may occur when the Plan fiduciary causes a Plan to acquire certificates in a trust in which the fiduciary (or its affiliate) is an obligor on the receivables held in the trust; provided that, among other requirements, (i) in the case of an acquisition in connection with the initial issuance of certificates, at least fifty percent of each class of certificates in which Plans have invested is acquired by persons independent of the Restricted Group and at least fifty percent of the aggregate interest in the trust is acquired by persons independent of the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with respect to five percent or less of the fair market value of the obligations contained in the trust; (iii) the Plan's investment in certificates of any class does not exceed twenty-five percent of all of the certificates of that class outstanding at the time of the acquisition; and (iv) immediately after the acquisition, no more than twenty-five percent of the assets of the Plan with respect to which such person is a fiduciary are invested in certificates representing an interest in one or more trusts containing assets sold or serviced by the same entity. The Exemptions do not apply to Plans sponsored by the Sponsor, the Certificate Insurer, the Underwriters, the Trustee, the Master Servicer, any other servicer, any obligor with respect to Mortgage Loans included in the Trust Estate constituting more than five percent of the aggregate unamortized principal balance of the assets in the Trust Estate, or any affiliate of such parties (the "Restricted Group"). As of the date hereof, there is no single Mortgage Loan included in the Trust Estate that constitutes more than five percent of the aggregate unamortized principal balance of the assets of the Trust Estate. Before purchasing an Offered Certificate based on the Exemptions, a fiduciary of a Plan should itself confirm (1) that such Certificate S-62 constitutes a "certificate" for purposes of the Exemptions and (2) that the conditions and other requirements set forth in the Exemptions would be satisfied. Any person purchasing a Class A Certificate and the related right to receive Supplemental Interest Amounts will have acquired, for purposes of ERISA and for federal income tax purposes, such Class A Certificate without the right to receive the Supplemental Interest Amounts, together with the right to receive the Supplemental Interest Amounts. The Exemptions do not apply to the acquisition, holding or resale of the right to receive the Supplemental Interest Amounts. Accordingly, the acquisition of the right to receive the Supplemental Interest Amounts by a Plan could result in a prohibited transaction unless another administrative exemption to ERISA's prohibited transaction rules is applicable. One or more alternative exemptions may be available with respect to certain prohibited transaction rules of ERISA that might apply in connection with the initial purchase, holding and resale of the right to receive the Supplemental Interest Amounts, including, but not limited to: (i) Prohibited Transaction Class Exemption ("PTCE") 91-38, regarding investments by bank collective investment funds; (ii) PTCE 90-1, regarding investments by insurance company pooled separate accounts; (iii) PTCE 84-14, regarding transactions negotiated by qualified professional asset managers; or (iv) PTCE 75-1, Part II, regarding principal transactions by broker-dealers (the "Principal Transactions Exemption"). It is believed that the conditions of the Principal Transactions Exemption will be met with respect to the acquisition of a right to receive the Supplemental Interest Amounts by a Plan, so long as such Underwriter is not a fiduciary with respect to the Plan (and is not a party in interest with respect to the Plan by reason of being a participating employer or affiliate thereof). Before purchasing Class A Certificates based on an administrative exemption (or exemptions), a fiduciary of a Plan should determine whether the conditions of such exemption (or exemptions) would be met and whether the scope of the relief provided by such exemption (or exemptions) would cover all acts that might be construed as prohibited transactions. Prospective Plan investors in the Offered Certificates should consult with their legal advisors concerning the impact of ERISA and the Code, the applicability of the Exemptions, and the potential consequences in their specific circumstances, prior to making an investment in the Offered Certificates. Moreover, each Plan fiduciary should determine whether under the general fiduciary standards of investment procedure and diversification an investment in the Offered Certificates is appropriate for the Plan, taking into account the overall investment policy of the Plan and the composition of the Plan's investment portfolio. In addition to the matters described above, purchasers of an Offered Certificate that are insurance companies should consult with their counsel with respect to the recent United States Supreme Court case interpreting the fiduciary responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank, 114 S.Ct. 517 (1993). In John Hancock, the Supreme Court ruled that assets held in an insurance company's general account may be deemed to be "plan assets" for ERISA purposes under certain circumstances. Prospective purchasers using insurance company general account assets should determine whether the decision affects their ability to make purchases of the Offered Certificates. RATINGS It is a condition of the original issuance of the Offered Certificates that they receive ratings of AAA by Standard & Poor's and Aaa by Moody's. The ratings assigned to the Offered Certificates will be based on the claims-paying ability of the Certificate Insurer. The ratings issued by Standard & Poor's and Moody's on payments of principal and interest do not cover the payment of the Supplemental Interest Amounts. Explanations of the significance of such ratings may be obtained from Moody's Investors Service, Inc., 99 Church Street, New York, New York 10007 and Standard & Poor's Ratings Group, a division of The McGraw Hill Companies, 25 Broadway, New York, New York 10004. Such ratings will be the views only of such rating agencies. There is no assurance that any such ratings will continue for any period of time or that such ratings will not be revised or withdrawn. Any such revision or withdrawal of such ratings may have an adverse effect on the market price of the Offered Certificates. LEGAL INVESTMENT CONSIDERATIONS Although upon their initial issuance all classes of Offered Certificates are expected to be rated AAA by Standard & Poor's and Aaa by Moody's, no class of the Offered Certificates will constitute "mortgage related securities" for purposes of SMMEA. S-63 UNDERWRITING Under the terms and subject to the conditions set forth in the Underwriting Agreement for the sale of the Offered Certificates, dated December 6, 1996 the Sponsor has agreed to cause the Trust to sell and the Underwriters have agreed to purchase the Offered Certificates. In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase the entire principal amount of each class of Offered Certificates in the amounts with respect to each Underwriter as set forth below:
Principal Amount Principal Amount of Class A-1 of Class A-2 Underwriter Certificates Certificates ----------- ------------- ------------- Prudential Securities Incorporated........................... $70,000,000 $40,000,000 Morgan Stanley & Co. Incorporated............................ $70,000,000 $40,000,000 Salomon Brothers Inc......................................... $70,000,000 $40,000,000 The Underwriters have agreed to reimburse the Sponsor for certain expenses of the issuance and distribution of the Offered Certificates. The Underwriters have informed the Sponsor that they propose to offer the Offered Certificates for sale from time to time in one or more negotiated transactions, or otherwise, at varying prices to be determined, in each case, at the time of the related sale. The Underwriters may effect such transactions by selling the Offered Certificates to or through dealers, and such dealers may receive compensation in the form of underwriting discounts, concessions or commissions from the Underwriters. In connection with the sale of the Offered Certificates, the Underwriters may be deemed to have received compensation from the Sponsor in the form of underwriting compensation. The Underwriters and any dealers that participate with the Underwriters in the distribution of the Offered Certificates may be deemed to be underwriters and any commissions received by them and any profit on the resale of the Offered Certificates by them may be deemed to be underwriting discounts and commissions under the Securities Act of 1933, as amended. Advanta Mortgage Conduit Services, Inc. has agreed to indemnify the Underwriters against certain liabilities including liabilities under the Securities Act of 1933, as amended. Advanta Mortgage Conduit Services, Inc. has been advised by the Underwriters that the Underwriters presently intend to make a market in the Offered Certificates, as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the Offered Certificates and such market-making may be discontinued at any time at the sole discretion of the Underwriters. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the Offered Certificates. EXPERTS The financial statements of Financial Guaranty Insurance Company included in this Prospectus Supplement in Appendix A and in the related Registration Statement, as of December 31, 1995 and 1994 and for each of the years in the three year period then ended, have been included in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing in Appendix A and in the related Registration Statement, upon the authority of such firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP refers to changes, in 1993, in accounting methods for multiple-year retrospectively rated reinsurance contracts, and for the adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." CERTAIN LEGAL MATTERS S-64 Certain legal matters relating to the validity of the issuance of the Certificates will be passed upon by Dewey Ballantine, New York, New York. S-65 INDEX OF PRINCIPAL DEFINED TERMS
Page 1933 Act .........................................................................................................2 Accrual Period ...................................................................................................9 Advanta Parent ..................................................................................................47 Appraised Values ................................................................................................23 Available Funds .................................................................................................56 Available Funds Shortfall .......................................................................................54 Average Amount Outstanding ......................................................................................21 Beneficial Owner ................................................................................................48 Beneficial Owners ............................................................................................2, 15 Book-Entry Certificates .........................................................................................48 Bulk Loans ......................................................................................................20 Business day ....................................................................................................55 Cede ............................................................................................................15 CEDEL ........................................................................................................2, 15 CEDEL Participants ..............................................................................................50 Certificate Insurance Policy .................................................................................2, 14 Certificate Insurer ..............................................................................................2 Certificates ..................................................................................................1, 4 Citibank ........................................................................................................16 Class A Certificates ..........................................................................................1, 4 Class A Distribution Amount .....................................................................................12 Class A Formula Distribution Amount .............................................................................12 Class A Interest Distribution Amount .............................................................................9 Class A Principal Distribution Amount ...........................................................................11 Class A-1 Available Funds Pass-Through Rate ......................................................................8 Class A-1 Certificate Principal Balance .........................................................................41 Class A-1 Certificates ...........................................................................................4 Class A-1 Formula Pass-Through Rate ..............................................................................9 Class A-1 Group I Certificates ...................................................................................1 Class A-1 Supplemental Interest Amount ...........................................................................7 Class A-2 Available Funds Pass-Through Rate ......................................................................8 Class A-2 Certificate Principal Balance .........................................................................41 Class A-2 Certificates ...........................................................................................4 Class A-2 Formula Pass-Through Rate ..............................................................................9 Class A-2 Group II Certificates ..................................................................................1 Class A-2 Supplemental Interest Amount ...........................................................................7 Class R Certificates ..........................................................................................1, 4 Clean-up Call Date ..............................................................................................16 Closing Date .....................................................................................................4 CMT .............................................................................................................19 Code ............................................................................................................62 Commission .......................................................................................................2 Compensating Interest ...........................................................................................15 Cooperative .....................................................................................................50 CPR .............................................................................................................41 Cut-Off Date .....................................................................................................4 D&P .............................................................................................................63 Definitive Certificate ..........................................................................................49 Delinquency Advances ............................................................................................15 DOL ...............................................................................................63
S-67
Page DTC ..........................................................................................................2, 15 DTC Participants ................................................................................................50 Euroclear ....................................................................................................2, 15 Euroclear Operator ..............................................................................................50 Euroclear Participants ..........................................................................................50 European Depositaries .......................................................................................16, 48 Excess Subordinated Amount ......................................................................................53 Exemptions ......................................................................................................63 FDIC ............................................................................................................48 Final Determination .............................................................................................61 Final Order .....................................................................................................56 Final Scheduled Payment Date .....................................................................................5 Financial Intermediary ..........................................................................................49 Fitch ...........................................................................................................63 FNMA ............................................................................................................31 Foreclosure Rate ................................................................................................21 GE Capital ......................................................................................................57 Gross Losses ....................................................................................................21 Group .........................................................................................................1, 4 Group I ...................................................................................................1, 4, 23 Group I Available Funds .........................................................................................55 Group I Certificates .............................................................................................1 Group I Insured Distribution Amount .............................................................................12 Group I Interest Distribution Amount ............................................................................10 Group II ..................................................................................................1, 5, 23 Group II Available Funds ........................................................................................55 Group II Certificates ............................................................................................1 Group II Insured Distribution Amount ............................................................................12 Group II Interest Distribution Amount ...........................................................................10 Group Interest Distribution Amount ..............................................................................10 HEP .............................................................................................................41 Indices .........................................................................................................19 Insured Distribution Amount .....................................................................................12 Insured Payment .................................................................................................13 Insurer Reimbursable Amount .....................................................................................54 Interest Determination Date .....................................................................................55 Junior Lien Ratio ...............................................................................................24 LIBO ............................................................................................................55 LIBOR ........................................................................................................7, 55 Liquidated Mortgage Loan ........................................................................................12 Master Servicer ..................................................................................................1 Master Transfer Agreements ......................................................................................60 Moody's .....................................................................................................16, 63 Morgan ..........................................................................................................16 Mortgage Loan File ..............................................................................................60 Mortgage Loan Group .......................................................................................1, 4, 23 Mortgage Loan Pool ...............................................................................................1 Mortgage Loans ................................................................................................1, 4 Mortgaged Properties ..........................................................................................1, 4 Mortgages .....................................................................................................1, 4 Net Losses ......................................................................................................21 Net Monthly Excess Cashflow......................................................................................54 Net Monthly Excess Spread........................................................................................52
S-67
Page Notes ...........................................................................................................23 Notional Principal Contract Regulations .........................................................................62 Offered Certificates ..........................................................................................1, 4 Owned and Managed Servicing Portfolio ...........................................................................20 Owner(s) ........................................................................................................48 Participants ....................................................................................................48 Payment Date ..................................................................................................2, 9 Plan Asset Regulation ...........................................................................................63 Plans ...........................................................................................................63 Pooling and Servicing Agreement ...............................................................................1, 4 Preference Amount ...............................................................................................56 Prepayment ......................................................................................................40 Prepayment Assumption ...........................................................................................62 Principal Transactions Exemption ................................................................................64 PTCE ............................................................................................................64 Purchase Option Period ..........................................................................................61 Realized Loss ...................................................................................................53 Record Date ......................................................................................................9 Recoveries ......................................................................................................21 Reference Banks .................................................................................................55 Relevant Depositary .............................................................................................48 REMIC ...........................................................................................................60 Remittance Date .................................................................................................48 Remittance Period ...............................................................................................48 Reserve Interest Rate ...........................................................................................55 Residual interest ...............................................................................................17 Restricted Group ...............................................................................................64 Reuters Screen LIBO page ........................................................................................55 Rules ...........................................................................................................49 Schedule of Mortgage Loans ......................................................................................60 Servicing released ..............................................................................................20 Specified Subordinated Amount ...................................................................................52 Specified Subordinated Amounts ..................................................................................41 Sponsor ..........................................................................................................1 Standard & Poor's ...........................................................................................16, 63 Statistic Calculation Pools ......................................................................................5 Step-Up Payment Date .............................................................................................9 Structuring Assumptions .........................................................................................41 Subordinated Amount .............................................................................................52 Subordination Deficit .......................................................................................13, 53 Subordination Increase Amount ...................................................................................52 Subordination Reduction Amount ..................................................................................53 Supplemental Interest Amount .....................................................................................8 Supplemental Interest Amounts ...................................................................................59 Termination Notice ..............................................................................................61 Terms and Conditions ............................................................................................50 Third-Party Servicing Portfolio .................................................................................20 Total Monthly Excess Cashflow ...................................................................................54 Total Monthly Excess Spread .....................................................................................52 Trust ............................................................................................................1 Trust Estate ....................................................................................................59 Trustee .......................................................................................................1, 4 Underwriters .....................................................................................................2
S-68
Page Weighted average life............................................................................................41
S-69 ANNEX I GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES Except in certain limited circumstances, the globally offered Advanta Mortgage Loan Trust 1996-3 Class A-1 and Class A-2 Certificates (the "Global Securities") will be available only in book-entry form. Investors in the Global Securities may hold such Global Securities through any of DTC, CEDEL or Euroclear. The Global Securities will be tradeable as home market instruments in both the European and U.S. domestic markets. Initial settlement and all secondary trades will settle in same-day funds. Secondary market trading between investors through CEDEL and Euroclear will be conducted in the ordinary way in accordance with the normal rules and operating procedures of CEDEL and Euroclear and in accordance with conventional eurobond practice (i.e., seven calendar day settlement). Secondary market trading between investors through DTC will be conducted according to DTC's rules and procedures applicable to U.S. corporate debt obligations. Secondary cross-market trading between CEDEL or Euroclear and DTC Participants holding Certificates will be effected on a delivery-against-payment basis through the respective Depositaries of CEDEL and Euroclear (in such capacity) and as DTC Participants. Non-U.S. holders (as described below) of Global Securities will be subject to U.S. withholding taxes unless such holders meet certain requirements and deliver appropriate U.S. tax documents to the securities clearing organizations or their participants. Initial Settlement All Global Securities will be held in book-entry form by DTC in the name of Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will be represented through financial institutions acting on their behalf as direct and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold positions on behalf of their participants through their Relevant Depository which in turn will hold such positions in their accounts as DTC Participants. Investors electing to hold their Global Securities through DTC will follow DTC settlement practices. Investor securities custody accounts will be credited with their holdings against payment in same-day funds on the settlement date. Investors electing to hold their Global Securities through CEDEL or Euroclear accounts will follow the settlement procedures applicable to conventional eurobonds, except that there will be no temporary global security and no "lock-up" or restricted period. Global Securities will be credited to the securities custody accounts on the settlement date against payment in same-day funds. Secondary Market Trading Since the purchaser determines the place of delivery, it is important to establish at the time of the trade where both the purchaser's and seller's accounts are located to ensure that settlement can be made on the desired value date. Trading between DTC Participants. Secondary market trading between DTC Participants will be settled using the procedures applicable to prior home equity loan asset-backed certificates issues in same-day funds. Trading between CEDEL and/or Euroclear Participants. Secondary market trading between CEDEL Participants or Euroclear Participants will be settled using the procedures applicable to conventional eurobonds in same-day funds. Trading between DTC, Seller and CEDEL or Euroclear Participants. When Global Securities are to be transferred from the account of a DTC Participant to the account of a CEDEL Participant or a Euroclear Participant, the purchaser will send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least AI-1 one business day prior to settlement. CEDEL or Euroclear will instruct the Relevant Depository, as the case may be, to receive the Global Securities against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment date to and excluding the settlement date, on the basis of the actual number of days in such accrual period and a year assumed to consist of 360 days. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. Payment will then be made by the Relevant Depository to the DTC Participant's account against delivery of the Global Securities. After settlement has been completed, the Global Securities will be credited to the respective clearing system and by the clearing system, in accordance with its usual procedures, to the CEDEL Participant's or Euroclear Participant's account. The securities credit will appear the next day (European time) and the cash debt will be back-valued to, and the interest on the Global Securities will accrue from, the value date (which would be the preceding day when settlement occurred in New York). If settlement is not completed on the intended value date (i.e., the trade fails), the CEDEL or Euroclear cash debt will be valued instead as of the actual settlement date. CEDEL Participants and Euroclear Participants will need to make available to the respective clearing systems the funds necessary to process same-day funds settlement. The most direct means of doing so is to preposition funds for settlement, either from cash on hand or existing lines of credit, as they would for any settlement occurring within CEDEL or Euroclear. Under this approach, they may take on credit exposure to CEDEL or Euroclear until the Global Securities are credited to their account one day later. As an alternative, if CEDEL or Euroclear has extended a line of credit to them, CEDEL Participants or Euroclear Participants can elect not to preposition funds and allow that credit line to be drawn upon to finance settlement. Under this procedure, CEDEL Participants or Euroclear Participants purchasing Global Securities would incur overdraft charges for one day, assuming they cleared the overdraft when the Global Securities were credited to their accounts. However, interest on the Global Securities would accrue from the value date. Therefore, in many cases the investment income on the Global Securities earned during that one-day period may substantially reduce or offset the amount of such overdraft charges, although the result will depend on each CEDEL Participant's or Euroclear Participant's particular cost of funds. Since the settlement is taking place during New York business hours, DTC Participants can employ their usual procedures for crediting Global Securities to the respective European Depository for the benefit of CEDEL Participants or Euroclear Participants. The sale proceeds will be available to the DTC seller on the settlement date. Thus, to the DTC Participants a cross-market transaction will settle no differently than a trade between two DTC Participants. Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time zone differences in their favor, CEDEL Participants and Euroclear Participants may employ their customary procedures for transactions in which Global Securities are to be transferred by the respective clearing system, through the respective Depository, to a DTC Participant. The seller will send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at least one business day prior to settlement. In these cases CEDEL or Euroclear will instruct the respective Depository, as appropriate, to credit the Global Securities to the DTC Participant's account against payment. Payment will include interest accrued on the Global Securities from and including the last coupon payment to and excluding the settlement date on the basis of the actual number of days in such accrual period and a year assumed to consist to 360 days. For transactions settling on the 31st of the month, payment will include interest accrued to and excluding the first day of the following month. The payment will then be reflected in the account of CEDEL Participant or Euroclear Participant the following day, and receipt of the cash proceeds in the CEDEL Participant's or Euroclear Participant's account would be back-valued to the value date (which would be the preceding day, when settlement occurred in New York). In the event that the CEDEL Participant or Euroclear Participant have a line of credit with its respective clearing system and elect to be in debt in anticipation of receipt of the sale proceeds in its account, the back-valuation will extinguish any overdraft incurred over that one-day period. If settlement is not completed on the intended value date (i.e., the trade fails), receipt of the cash proceeds in the CEDEL Participant's or Euroclear Participant's account would instead be valued as of the actual settlement date. Finally, day traders that use CEDEL or Euroclear and that purchase Global Securities from DTC Participants for delivery to CEDEL Participants or Euroclear Participants should note that these trades would automatically fail on the sale side unless affirmative action is taken. At least three techniques should be readily available to eliminate this potential problem: (a) borrowing through CEDEL or Euroclear for one day (until the purchase side of the trade is reflected in their CEDEL or Euroclear accounts) in accordance with the clearing system's customary procedures; AI-2 (b) borrowing the Global Securities in the U.S. from a DTC Participant no later than one day prior to settlement, which would give the Global Securities sufficient time to be reflected in their CEDEL or Euroclear account in order to settle the sale side of the trade; or (c) staggering the value dates for the buy and sell sides of the trade so that the value date for the purchase from the DTC Participant is at least one day prior to the value date for the sale to the CEDEL Participant or Euroclear Participant. Certain U.S. Federal Income Tax Documentation Requirements A beneficial owner of Global Securities holding securities through CEDEL or Euroclear (or through DTC if the holder has an address outside the U.S.) will be subject to the 30% U.S. withholding tax that generally applies to payments of interest (including original issue discount) on registered debt issued by U.S. Persons (as defined below), unless (i) each clearing system, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business in the chain of intermediaries between such beneficial owner and the U.S. entity required to withhold tax complies with applicable certification requirements and (ii) such beneficial owner takes one of the following steps to obtain an exemption or reduced tax rate: Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global Securities that are Non-U.S. Persons (as defined below) can obtain a complete exemption from the withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If the information shown on Form W-8 changes, a new Form W-8 must be filed within 30 days of such change. Exemption for Non-U.S. Persons with effectively connected income (Form 4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or bank with a U.S. branch, for which the interest income is effectively connected with its conduct of a trade or business in the United States, can obtain an exemption from the withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States). Exemption or reduced rate for non-U.S. Persons resident in treaty countries (Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with the United States can obtain an exemption or reduced tax rate (depending on the treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only for a reduced rate, withholding tax will be imposed at that rate unless the filer alternatively files Form W-8. Form 1001 may be filed by Certificate Owners or their agent. Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete exemption from the withholding tax by filing Form W-9 (Payer's Request for Taxpayer Identification Number and Certification). U.S. Federal Income Tax Reporting Procedure. The Owner of a Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by submitting the appropriate form to the person through whom it holds (the clearing agency, in the case of persons holding directly on the books of the clearing agency). Form W-8 and Form 1001 are effective for three calendar years and Form 4224 is effective for one calendar year. On April 22, 1996, the IRS proposed regulations relating to withholding, backup withholding and information reporting that, if adopted in their current form would, among other things, unify current certification procedures and forms and clarify certain reliance standards. The regulations are proposed to be effective for payments made after December 31, 1997 but provide that certificates issued on or before the date that is 60 days after the proposed regulations are made final will continue to be valid until they expire. Proposed regulations, however, are subject to change prior to their adoption in final form. The term "U.S. Person" means (i) a citizen or resident of the United States, (ii) a corporation, partnership or other entity organized in or under the laws of the United States or any political subdivision thereof or (iii) an estate or trust that is subject to U.S. federal income tax regardless of the source of its income. The term "Non-U.S. Person" means any person who is not a U.S. Person. This summary does not deal with all aspects of U.S. Federal income tax withholding that may be relevant to foreign holders of the Global Securities. Investors are advised to consult their own tax advisors for specific tax advice concerning their holding and disposing of the Global Securities. AI-3 APPENDIX A [FGIC audited financial statements as of December, 1995 and December, 1994] FINANCIAL GUARANTY INSURANCE COMPANY Audited Financial Statements December 31, 1995 Report of Independent Auditors...........1 Balance Sheets...........................2 Statements of Income.....................3 Statements of Stockholder's Equity.......4 Statements of Cash Flows.................5 Notes to Financial Statements............6 Report of Independent Auditors The Board of Directors and Stockholder Financial Guaranty Insurance Company: We have audited the accompanying balance sheets of Financial Guaranty Insurance Company as of December 31, 1995 and 1994, and the related statements of income, stockholder's equity, and cash flows for each of the years in the three year period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Financial Guaranty Insurance Company as of December 31, 1995 and 1994 and the results of its operations and its cash flows for each of the years in the three year period then ended in conformity with generally accepted accounting principles. As described in notes 6 and 2, respectively, in 1993, the Company changed its methods of accounting for multiple-year retrospectively rated reinsurance contracts and for the adoption of the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. January 19, 1996 1 Financial Guaranty Insurance Company Balance Sheets - -------------------------------------------------------------------------------- ($ in Thousands, except per share amounts)
December 31, December 31, Assets 1995 1994 ------------ ------------ Fixed maturity securities available-for-sale (amortized cost of $2,043,453 in 1995 and $1,954,177 in 1994) $ 2,141,584 $ 1,889,910 Short-term investments, at cost, which approximates market 91,032 75,674 Cash 199 1,766 Accrued investment income 37,347 40,637 Reinsurance recoverable 7,672 14,472 Prepaid reinsurance premiums 162,087 164,668 Deferred policy acquisition costs 94,868 90,928 Property and equipment, net of accumulated depreciation ($12,861 in 1995 and $10,512 in 1994) 6,314 7,912 Receivable for securities sold 26,572 - Prepaid expenses and other assets 12,627 12,243 ----------- ----------- Total assets $ 2,580,302 $ 2,298,210 =========== =========== Liabilities and Stockholder's Equity Liabilities: Unearned premiums $ 727,535 $ 757,425 Loss and loss adjustment expenses 77,808 98,746 Ceded reinsurance balances payable 1,942 2,258 Accounts payable and accrued expenses 32,811 28,489 Payable to Parent 1,647 18,600 Current federal income taxes payable 51,296 82,123 Deferred federal income taxes 99,171 22,640 Payable for securities purchased 40,211 8,206 ----------- ----------- Total liabilities 1,032,421 1,018,487 ----------- ----------- Stockholder's Equity: Common stock, par value $1,500 per share; 10,000 shares authorized, issued and outstanding 15,000 15,000 Additional paid-in capital 334,011 334,011 Net unrealized gains (losses) on fixed maturity securities available- for-sale, net of tax 63,785 (41,773) Foreign currency translation adjustment (1,499) (1,221) Retained earnings 1,136,584 973,706 ----------- ----------- Total stockholder's equity 1,547,881 1,279,723 ----------- ----------- Total liabilities and stockholder's equity $ 2,580,302 $ 2,298,210 =========== ===========
See accompanying notes to financial statements. 2 Financial Guaranty Insurance Company Statements of Income - -------------------------------------------------------------------------------- ($ in Thousands)
For the Year Ended December 31, --------------------------------- 1995 1994 1993 ---- ---- ---- Revenues: Gross premiums written $ 97,288 $ 161,940 $ 291,052 Ceded premiums (19,319) (46,477) (49,914) --------- --------- --------- Net premiums written 77,969 115,463 241,138 Decrease (increase) in net unearned premiums 27,309 53,364 (74,902) --------- --------- --------- Net premiums earned 105,278 168,827 166,236 Net investment income 120,398 109,828 99,920 Net realized gains 30,762 5,898 35,439 --------- --------- --------- Total revenues 256,438 284,553 301,595 --------- --------- --------- Expenses: Loss and loss adjustment expenses (8,426) 3,646 42,894 Policy acquisition costs 13,072 15,060 19,592 (Increase) decrease in deferred policy acquisition costs (3,940) 3,709 2,658 Other underwriting expenses 19,100 21,182 21,878 --------- --------- --------- Total expenses 19,806 43,597 87,022 --------- --------- --------- Income before provision for Federal income taxes 236,632 240,956 214,573 --------- --------- --------- Federal income tax expense (benefit): Current 28,913 43,484 59,505 Deferred 19,841 7,741 (7,284) --------- --------- --------- Total Federal income tax expense 48,754 51,225 52,221 --------- --------- --------- Net income before cumulative effect of change in accounting principle 187,878 189,731 162,352 --------- --------- --------- Net cumulative effect of change in accounting principle - - 3,008 --------- --------- --------- Net income $ 187,878 $ 189,731 $ 165,360 ========= ========= =========
See accompanying notes to financial statements. 3 Financial Guaranty Insurance Company Statements of Stockholder's Equity - -------------------------------------------------------------------------------- ($ in Thousands)
Net Unrealized Gains (Losses) on Fixed Maturity Securities Additional Available- Foreign Common Paid-in For-Sale, Currency Retained Stock Capital Net of Tax Adjustment Earnings ------ ---------- -------------- ---------- -------- Balance, January 1, 1993 $ 2,500 $ 324,639 $ 7,267 $(1,597) $ 618,615 Net income - - - - 165,360 Capital contribution - 21,872 - - - Adjustment to common stock par value 12,500 (12,500) - - - Unrealized gains on fixed maturity securities previously held at market, net of tax of ($713) - - (1,325) - - Implementation of change in accounting for adoption of SFAS 115, net of tax of $45,643 - - 84,766 - - Foreign currency translation adjustment - - - (668) - ------- --------- --------- ------- ----------- Balance, December 31, 1993 15,000 334,011 90,708 (2,265) 783,975 Net income - - - - 189,731 Unrealized losses on fixed maturity securities available-for-sale, net of tax of ($71,336) - - (132,481) - - Foreign currency translation adjustment - - - 1,044 - ------- --------- --------- ------- ----------- Balance, December 31, 1994 15,000 334,011 (41,773) (1,221) 973,706 Net income - - - - 187,878 Dividend paid - - - - (25,000) Unrealized gains on fixed maturity securities available for sale, net of tax of $56,839 - - 105,558 - - Foreign currency translation adjustment - - - (278) - ------- --------- --------- ------- ----------- Balance, December 31, 1995 $15,000 $ 334,011 $ 63,785 $(1,499) $ 1,136,584 ======= ========= ========= ======= ===========
See accompanying notes to financial statements. 4 Financial Guaranty Insurance Company Statements of Cash Flows - -------------------------------------------------------------------------------- ($ in Thousands)
For the Year Ended December 31, ----------------------------------- 1995 1994 1993 ---- ---- ---- Operating Activities: Net income $ 187,878 $ 189,731 $ 165,360 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle, net of tax - - (3,008) Change in unearned premiums (29,890) (45,927) 90,429 Change in loss and loss adjustment expense reserves (20,938) 2,648 51,264 Depreciation of property and equipment 2,348 2,689 2,012 Change in reinsurance receivable 6,800 (304) (9,040) Change in prepaid reinsurance premiums 2,581 (7,437) (15,527) Change in foreign currency translation adjustment (427) 1,607 (1,029) Policy acquisition costs deferred (16,219) (18,306) (19,592) Amortization of deferred policy acquisition costs 12,279 22,015 22,250 Change in accrued investment income, and prepaid expenses and other assets 2,906 (5,150) (9,048) Change in other liabilities (12,946) 2,577 7,035 Change in deferred income taxes 19,841 7,741 (7,284) Amortization of fixed maturity securities 1,922 5,112 8,976 Change in current income taxes payable (30,827) 33,391 30,089 Net realized gains on investments (30,762) (5,898) (35,439) --------- --------- ----------- Net cash provided by operating activities 94,546 184,489 277,448 --------- --------- ----------- Investing Activities: Sales and maturities of fixed maturity securities 836,103 550,534 789,036 Purchases of fixed maturity securities (891,108) (721,908) (1,090,550) Purchases, sales and maturities of short-term investments, net (15,358) (11,486) 4,164 Purchases of property and equipment, net (750) (1,290) (985) --------- --------- ----------- Net cash used in investing activities (71,113) (184,150) (298,335) --------- --------- ----------- Financing Activities: Dividends paid (25,000) - - Capital contribution - - 21,872 --------- --------- ----------- Net cash provided by financing activities (25,000) - 21,872 --------- --------- ----------- (Decrease) Increase in cash (1,567) 339 985 Cash at beginning of year 1,766 1,427 442 --------- --------- ----------- Cash at end of year $ 199 $ 1,766 $ 1,427 ========= ========= ===========
See accompanying notes to financial statements. 5 Financial Guaranty Insurance Company Notes to Financial Statements - -------------------------------------------------------------------------------- (1) Business Financial Guaranty Insurance Company (the "Company"), a wholly-owned insurance subsidiary of FGIC Corporation (the "Parent"), provides financial guaranty insurance on newly issued municipal bonds and municipal bonds trading in the secondary market, the latter including bonds held by unit investment trusts and mutual funds. The Company also insures structured debt issues outside the municipal market. Approximately 88% of the business written since inception by the Company has been municipal bond insurance. The Company insures only those securities that, in its judgment, are of investment grade quality. Municipal bond insurance written by the Company insures the full and timely payment of principal and interest when due on scheduled maturity, sinking fund or other mandatory redemption and interest payment dates to the holders of municipal securities. The Company's insurance policies do not provide for accelerated payment of the principal of, or interest on, the bond insured in the case of a payment default. If the issuer of a Company-insured bond defaults on its obligation to pay debt service, the Company will make scheduled interest and principal payments as due and is subrogated to the rights of bondholders to the extent of payments made by it. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) Significant Accounting Policies The accompanying financial statements have been prepared on the basis of generally accepted accounting principles ("GAAP") which differ in certain respects from the accounting practices prescribed or permitted by regulatory authorities (see Note 3). The prior years financial statements have been reclassified to conform to the 1995 presentation. Significant accounting policies are as follows: Investments As of December 31, 1993, the Company adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities." The Statement defines three categories for classification of debt securities and the related accounting treatment for each respective category. The Company has determined that its fixed maturity securities portfolio should be classified as available-for-sale. Under SFAS 115, securities held as available-for-sale are recorded at fair value and unrealized holding gains/losses are recorded as a separate component of stockholder's equity, net of applicable income taxes. Short-term investments are carried at cost, which approximates fair value. Bond discounts and premiums are amortized over the remaining terms of the securities. Realized gains or losses on the sale of investments are determined on the basis of specific identification. Premium Revenue Recognition Premiums are earned over the period at risk in proportion to the amount of coverage provided which, for financial guaranty insurance policies, generally declines according to predetermined schedules. When unscheduled refundings of municipal bonds occur, the related unearned premiums, net of premium credits allowed against the premiums charged for insurance of refunding issues and applicable acquisition costs, are earned 6 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- immediately. Unearned premiums represent the portion of premiums written related to coverage yet to be provided on policies in force. Policy Acquisition Costs Policy acquisition costs include only those expenses that relate directly to premium production. Such costs include compensation of employees involved in underwriting, marketing and policy issuance functions, rating agency fees, state premium taxes and certain other underwriting expenses, offset by ceding commission income on premiums ceded to reinsurers (see Note 6). Net acquisition costs are deferred and amortized over the period in which the related premiums are earned. Anticipated loss and loss adjustment expenses are considered in determining the recoverability of acquisition costs. Loss and Loss Adjustment Expenses Provision for loss and loss adjustment expenses is made in an amount equal to the present value of unpaid principal and interest and other payments due under insured risks at the balance sheet date for which, in management's judgment, the likelihood of default is probable. Such reserves amounted to $77.8 million and $98.7 million at December 31, 1995 and 1994, respectively. As of December 31, 1995 and 1994, such reserves included $28.8 million and $71.0 million, respectively, established based on an evaluation of the insured portfolio in light of current economic conditions and other relevant factors. Loss and loss adjustment expenses include amounts discounted at an interest rate of 5.5% in 1995 and 7.8% in 1994. The reserve for loss and loss adjustment expenses is necessarily based upon estimates, however, in management's opinion the reserves for loss and loss adjustment expenses is adequate. However, actual results will likely differ from those estimates. Income Taxes Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These temporary differences relate principally to unrealized gains (losses) on fixed maturity securities available-for-sale, premium revenue recognition, deferred acquisition costs and deferred compensation. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Financial guaranty insurance companies are permitted to deduct from taxable income, subject to certain limitations, amounts added to statutory contingency reserves (see Note 3). The amounts deducted must be included in taxable income upon their release from the reserves or upon earlier release of such amounts from such reserves to cover excess losses as permitted by insurance regulators. The amounts deducted are allowed as deductions from taxable income only to the extent that U.S. government non-interest bearing tax and loss bonds are purchased and held in an amount equal to the tax benefit attributable to such deductions. Property and Equipment Property and equipment consists of furniture, fixtures, equipment and leasehold improvements which are recorded at cost and are charged to income over their estimated service lives. Office furniture and equipment are depreciated straight-line over five years. Leasehold improvements are amortized over their estimated service life or over the life of the lease, whichever is shorter. Computer equipment and software are depreciated over three years. Maintenance and repairs are charged to expense as incurred. 7 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- Foreign Currency Translation The Company has established foreign branches in France and the United Kingdom and determined that the functional currencies of these branches are local currencies. Accordingly, the assets and liabilities of these foreign branches are translated into U.S. dollars at the rates of exchange existing at December 31, 1995 and 1994 and revenues and expenses are translated at average monthly exchange rates. The cumulative translation loss at December 31, 1995 and 1994 was $1.5 million and $1.2 million, respectively, net of tax, and is reported as a separate component of stockholder's equity. (3) Statutory Accounting Practices The financial statements are prepared on the basis of GAAP, which differs in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities. The following are the significant ways in which statutory-basis accounting practices differ from GAAP: (a) premiums are earned in proportion to the reduction of the related risk rather than in proportion to the coverage provided; (b) policy acquisition costs are charged to current operations as incurred rather than as related premiums are earned; (c) a contingency reserve is computed on the basis of statutory requirements for the security of all policyholders, regardless of whether loss contingencies actually exist, whereas under GAAP, a reserve is established based on an ultimate estimate of exposure; (d) certain assets designated as non-admitted assets are charged directly against surplus but are reflected as assets under GAAP, if recoverable; (e) federal income taxes are only provided with respect to taxable income for which income taxes are currently payable, while under GAAP taxes are also provided for differences between the financial reporting and the tax bases of assets and liabilities; (f) purchases of tax and loss bonds are reflected as admitted assets, while under GAAP they are recorded as federal income tax payments; and (g) all fixed income investments are carried at amortized cost rather than at fair value for securities classified as available-for-sale under GAAP. 8 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- The following is a reconciliation of net income and stockholder's equity presented on a GAAP basis to the corresponding amounts reported on a statutory-basis for the periods indicated below (in thousands):
Years Ended December 31, -------------------------------------------------------------------------------- 1995 1994 1993 ------------------------- ------------------------- ------------------------ Net Stockholder's Net Stockholder's Net Stockholders Income Equity Income Equity Income Equity ------ ------------- ------ ------------- ------ ------------ GAAP basis amount $ 187,878 $ 1,547,881 $ 189,731 $ 1,279,723 $ 165,360 $ 1,221,429 Premium revenue recognition (22,555) (166,927) (4,970) (144,372) (16,054) (139,401) Deferral of acquisition costs (3,940) (94,868) 3,709 (90,928) 2,658 (94,637) Contingency reserve - (386,564) - (328,073) - (252,542) Non-admitted assets - (5,731) - (7,566) - (8,951) Case basis loss reserves 4,048 (52) (3,340) (4,100) 1,626 (759) Portfolio loss reserves (22,100) 24,000 (11,050) 46,100 43,650 57,150 Deferral of income taxes (benefits) 19,842 64,825 7,741 45,134 (7,284) 35,209 Unrealized gains (losses) on fixed maturity securities held at fair value, net of tax - (63,785) - 41,773 - (90,708) Recognition of profit commission 3,096 (5,744) (2,410) (8,840) (4,811) (4,811) Provision for unauthorized reinsurance - - - (266) - Contingency reserve tax deduction (see Note 2) - 78,196 - 55,496 - 45,402 Allocation of tax benefits due to Parent's net operating loss to the Company (see Note 5) 637 10,290 (63) 9,653 - 9,716 --------- ----------- --------- ----------- --------- ----------- Statutory-basis amount $ 166,906 $ 1,001,521 $ 179,348 $ 893,734 $ 185,145 $ 777,097 ========= =========== ========= =========== ========= ===========
9 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- (4) Investments Investments in fixed maturity securities carried at fair value of $3.2 million and $3.0 million as of December 31, 1995 and 1994, respectively, were on deposit with various regulatory authorities as required by law. The amortized cost and fair values of short-term investments and of investments in fixed maturity securities classified as available-for-sale are as follows (in thousands):
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair 1995 Cost Gains Losses Value - ---- ---------- ---------- ---------- ---------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 71,182 $ 1,696 - $ 72,878 Obligations of states and political subdivisions 1,942,001 98,458 $1,625 2,038,834 Debt securities issued by foreign governments 30,270 152 550 29,872 ---------- -------- ------ ---------- Investments available-for-sale 2,043,453 100,306 2,175 2,141,584 Short-term investments 91,032 - - 91,032 ---------- -------- ------ ---------- Total $2,134,485 $100,306 $2,175 $2,232,616 ========== ======== ====== ==========
The amortized cost and fair values of short-term investments and of investments in fixed maturity securities available-for-sale at December 31, 1995, by contractual maturity date, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair 1995 Cost Value ---- ---------- ---------- Due in one year or less $ 99,894 $ 99,984 Due after one year through five years 137,977 141,235 Due after five years through ten years 287,441 300,560 Due after ten years through twenty years 1,406,219 1,476,261 Due after twenty years 202,954 214,576 ---------- ---------- Total $2,134,485 $2,232,616 ========== ========== 10 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - --------------------------------------------------------------------------------
Gross Gross Unrealized Unrealized Amortized Holding Holding Fair 1994 Cost Gains Losses Value - ---- ---------- ---------- ---------- ---------- U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 10,945 $ 8 $ (519) $ 10,434 Obligations of states and political subdivisions 1,839,566 25,809 (85,200) 1,780,175 Debt securities issued by foreign governments 103,666 400 (4,765) 99,301 ---------- ------- -------- ---------- Investments available-for-sale 1,954,177 26,217 (90,484) 1,889,910 Short-term investments 75,674 - - 75,674 ---------- ------- -------- ---------- Total $2,029,851 $26,217 $(90,484) $1,965,584 ========== ======= ======== ==========
In 1995, 1994 and 1993, proceeds from sales of investments in fixed maturity securities available-for-sale carried at fair value were $836.1 million, $550.5 million, and $789.0 million, respectively. For 1995, 1994 and 1993 gross gains of $36.3 million, $18.2 million and $36.1 million respectively, and gross losses of $5.5 million, $12.3 million and $1.0 million respectively, were realized on such sales. Net investment income of the Company is derived from the following sources (in thousands): Year Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- Income from fixed maturity securities $112,684 $108,519 $ 97,121 Income from short-term investments 8,450 2,479 3,914 -------- -------- -------- Total investment income 121,134 110,998 101,035 Investment expenses 736 1,170 1,115 -------- -------- -------- Net investment income $120,398 $109,828 $ 99,920 ======== ======== ======== As of December 31, 1995, the Company did not have more than 10% of its investment portfolio concentrated in a single issuer or industry. 11 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- (5) Income Taxes The Company files a federal tax return as part of the consolidated return of General Electric Capital Corporation ("GE Capital"). Under a tax sharing agreement with GE Capital, taxes are allocated to the Company and the Parent based upon their respective contributions to consolidated net income. The Company's effective federal corporate tax rate (20.6 percent in 1995, 21.3 percent in 1994 and 24.3 percent in 1993) is less than the corporate tax rate on ordinary income of 35 percent in 1995, 1994 and 1993. Federal income tax expense (benefit) relating to operations of the Company for 1995, 1994 and 1993 is comprised of the following (in thousands): Year Ended December 31, ---------------------------- 1995 1994 1993 ------- ------- -------- Current tax expense $28,913 $43,484 $ 59,505 Deferred tax expense 19,841 7,741 (7,284) ------- ------- -------- Federal income tax expense $48,754 $51,225 $ 52,221 ======= ======= ======== The following is a reconciliation of federal income taxes computed at the statutory rate and the provision for federal income taxes (in thousands): Year Ended December 31, -------------------------------- 1995 1994 1993 -------- -------- -------- Income taxes computed on income before provision for federal income taxes, at the statutory rate $ 82,821 $ 84,334 $ 75,101 Tax effect of: Tax-exempt interest (30,630) (30,089) (27,185) Other, net (3,437) (3,020) 4,305 -------- -------- -------- Provision for income taxes $ 48,754 $ 51,225 $ 52,221 ======== ======== ======== 12 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- The tax effects of temporary differences that give rise to significant portions of the deferred tax liabilities at December 31, 1995 and 1994 are presented below (in thousands): 1995 1994 -------- ------- Deferred tax assets: Unrealized losses on fixed maturity securities, available-for-sale - $22,493 Loss reserves $ 8,382 16,136 Deferred compensation 5,735 9,685 Tax over book capital gains 1,069 365 Other 3,248 3,760 -------- ------- Total gross deferred tax assets 18,434 52,439 -------- ------- Deferred tax liabilities: Unrealized gains on fixed maturity securities, available-for-sale 34,346 - Deferred acquisition costs 33,204 31,825 Premium revenue recognition 32,791 24,674 Rate differential on tax and loss bonds 9,454 9,454 Other 7,810 9,126 -------- ------- Total gross deferred tax liabilities 117,605 75,079 -------- ------- Net deferred tax liability $ 99,171 $22,640 ======== ======= Based upon the level of historical taxable income, projections of future taxable income over the periods in which the deferred tax assets are deductible and the estimated reversal of future taxable temporary differences, the Company believes it is more likely than not that it will realize the benefits of these deductible differences and has not established a valuation allowance at December 31, 1995 and 1994. The company anticipates that the related deferred tax asset will be realized. Total federal income tax payments during 1995, 1994 and 1993 were $59.8 million, $10.1 million, and $29.4 million, respectively. (6) Reinsurance The Company reinsures portions of its risk with other insurance companies through quota share reinsurance treaties and, where warranted, on a facultative basis. This process serves to limit the Company's exposure on risks underwritten. In the event that any or all of the reinsuring companies were unable to meet their obligations, the Company would be liable for such defaulted amounts. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from activities or economic characteristics of the reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The Company holds collateral under reinsurance agreements in the form of letters of credit and trust agreements in various amounts with various reinsurers totaling $33.7 million that can be drawn on in the event of default. Effective January 1, 1993, the Company adopted the Emerging Issues Task Force Issue 93-6, "Accounting for Multiple-Year Retrospectively-Rated Contracts by Ceding and Assuming Enterprises" ("EITF 93-6"). EITF 93-6 requires that an asset be recognized by a ceding company to the extent a payment would be received from the reinsurer based on the contract's experience to date, regardless of the outcome of future events. To reflect the adoption of EITF 93-6 in the accompanying financial statements, an initial adjustment of $4.6 million, before applicable income taxes, has been reflected in the 1993 income statement. Net premiums earned are presented net of ceded earned premiums of $21.9 million, $39.0 million and $34.4 million for the years ended December 31, 1995, 1994 and 1993, respectively. Loss and loss adjustment expenses incurred are presented net of ceded losses of $1.1 million, $0.3 million and $9.1 million for the years ended December 31, 1995, 1994 and 1993, respectively. 13 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- (7) Loss and Loss Adjustment Expenses Activity in the reserve for loss and loss adjustment expenses is summarized as follows (in thousands): Year Ended December 31, -------------------------------- 1995 1994 1993 -------- -------- -------- Balance at January 1, $ 98,746 $ 96,098 $ 44,834 Less reinsurance recoverable 14,472 14,168 5,128 -------- -------- -------- Net balance at January 1, 84,274 81,930 39,706 Incurred related to: Current year 26,681 15,133 - Prior years (1,207) (437) (756) Portfolio reserves (33,900) (11,050) 43,650 -------- -------- -------- Total Incurred (8,426) 3,646 42,894 -------- -------- -------- Paid related to: Current year (197) (382) - Prior years (5,515) (920) (670) -------- -------- -------- Total Paid (5,712) (1,302) (670) -------- -------- -------- Net balance at December 31, 70,136 84,274 81,930 Plus reinsurance recoverable 7,672 14,472 14,168 -------- -------- -------- Balance at December 31, $ 77,808 $ 98,746 $ 96,098 ======== ======== ======== The changes in incurred portfolio reserves principally relate to business written in prior years. The changes are based upon an evaluation of the insured portfolio in light of current economic conditions and other relevant factors. (8) Related Party Transactions The Company has various agreements with subsidiaries of General Electric Company ("GE") and GE Capital. These business transactions include appraisal fees and due diligence costs associated with underwriting structured finance mortgage-backed security business; payroll and office expenses incurred by the Company's international branch offices but processed by a GE subsidiary; investment fees pertaining to the management of the Company's investment portfolio; and telecommunication service charges. Approximately $3.2 million, $3.2 million and $1.0 million in expenses were incurred in 1995, 1994 and 1993, respectively, related to such transactions. The Company also insured certain non-municipal issues with GE Capital involvement as sponsor of the insured securitization and/or servicer of the underlying assets. For some of these issues, GE Capital also provides first loss protection in the event of default. Gross premiums written on these issues amounted to $1.3 million in 1995, $2.5 million in 1994, and $3.3 million in 1993. The Company insures bond issues and securities in trusts that were sponsored by affiliates of GE (approximately 1 percent of gross premiums written in 1995 and 1994 and 2 percent in 1993). (9) Compensation Plans Officers and other key employees of the Company participate in the Parent's incentive compensation, deferred compensation and profit sharing plans. Expenses incurred by the Company under compensation plans and bonuses amounted to $7.5 million, $12.2 million and $16.7 million in 1995, 1994 and 1993, respectively, before deduction for related tax benefits. (10) Dividends Under New York insurance law, the Company may pay a dividend only from earned surplus subject to the following limitations: (a) statutory surplus after such dividend may not be less than the minimum required paid-in capital, which was $2.1 million in 1995 and 1994, and (b) dividends may not exceed the lesser of 10 percent of its surplus or 100 percent of adjusted net investment income, as defined by New York insurance law, for the 12 month period ending on the preceding December 31, without the prior approval of the Superintendent of the New York State Insurance Department. At December 31, 1995 and 1994, the amount of the Company's surplus available for dividends was approximately $100.2 million and $89.3 million, respectively. During 1995, the company paid dividends of $25 million. No dividends were paid during 1994 or 1993. 14 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- (11) Financial Instruments Fair Value of Financial Instruments The following methods and assumptions were used by the Company in estimating fair values of financial instruments: Fixed Maturity Securities: Fair values for fixed maturity securities are based on quoted market prices, if available. If a quoted market price is not available, fair values is estimated using quoted market prices for similar securities. Fair value disclosure for fixed maturity securities is included in the balance sheets and in Note 4. Short-Term Investments: Short-term investments are carried at cost, which approximates fair value. Cash, Receivable for Securities Sold, and Payable for Securities Purchased: The carrying amounts of these items approximate their fair values. The estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 are as follows (in thousands): 1995 1994 ----------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value Financial Assets Cash $ 199 $ 199 $ 1,766 $ 1,766 On hand and in demand acounts Short-term investments 91,032 91,032 75,674 75,674 Fixed maturity securities 2,131,584 2,141,584 2,141,584 1889,910 Financial Guaranties: The carrying value of the Company's financial guaranties is represented by the unearned premium reserve, net of deferred acquisition costs, and loss and loss adjustment expense reserves. Estimated fair values of these guaranties are based on amounts currently charged to enter into similar agreements (net of applicable ceding commissions), discounted cash flows considering contractual revenues to be received adjusted for expected prepayments, the present value of future obligations and estimated losses, and current interest rates. The estimated fair values of such financial guaranties range between $412.8 million and $456.2 million compared to a carrying value of $540.6 million as of December 31, 1995 and between $518.1 million and $565.9 million compared to a carrying value of $585.1 million as of December 31, 1994. 15 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- Concentrations of Credit Risk The Company considers its role in providing insurance to be credit enhancement rather than credit substitution. The Company insures only those securities that, in its judgment, are of investment grade quality. The Company has established and maintains its own underwriting standards that are based on those aspects of credit that the Company deems important for the particular category of obligations considered for insurance. Credit criteria include economic and social trends, debt management, financial management and legal and administrative factors, the adequacy of anticipated cash flows, including the historical and expected performance of assets pledged for payment of securities under varying economic scenarios and underlying levels of protection such as insurance or overcollateralization. In connection with underwriting new issues, the Company sometimes requires, as a condition to insuring an issue, that collateral be pledged or, in some instances, that a third-party guarantee be provided for a term of the obligation insured by a party of acceptable credit quality obligated to make payment prior to any payment by the Company. The types and extent of collateral pledged varies, but may include residential and commercial mortgages, corporate debt, government debt and consumer receivables. As of December 31, 1995, the Company's total insured principal exposure to credit loss in the event of default by bond issuers was $98.7 billion, net of reinsurance of $20.7 billion. The Company's insured portfolio as of December 31, 1995 was broadly diversified by geography and bond market sector with no single debt issuer representing more than 1% of the Company's principal exposure outstanding, net of reinsurance. As of December 31, 1995, the composition of principal exposure by type of issue, net of reinsurance, was as follows (in millions): Net Principal Outstanding ----------- Municipal: General obligation $43,308.2 Special revenue 38,137.9 Industrial revenue 2,480.0 Non-municipal 14,734.2 --------- Total $98,660.3 ========= 16 Financial Guaranty Insurance Company Notes to Financial Statements (Continued) - -------------------------------------------------------------------------------- The Company is authorized to do business in 50 states, the District of Columbia, and in the United Kingdom and France. Principal exposure outstanding at December 31, 1995 by state, net of reinsurance, was as follows (in millions): Net Principal Outstanding ----------- California $ 10,440.2 Florida 8,869.3 Pennsylvania 8,653.4 New York 7,706.7 Illinois 5,697.5 Texas 5,478.7 New Jersey 4,181.9 Michigan 3,385.9 Arizona 2,776.9 Ohio 2,327.7 ----------- Sub-total 59,518.2 Other states and International 39,142.1 ----------- Total $ 98,660.3 =========== (12) Commitments Total rent expense was $2.2 million, $2.6 million and $2.4 million in 1995, 1994 and 1993, respectively. For each of the next five years and in the aggregate as of December 31, 1995, the minimum future rental payments under noncancellable operating leases having remaining terms in excess of one year approximate (in thousands): Year Amount ---- ------ 1996 $ 2,297 1997 2,909 1998 2,909 1999 2,909 2000 2,909 Subsequent to 2000 2,911 ------- Total minimum future rental payment $16,844 ======= 17 APPENDIX B [FGIC unaudited financial statements as of September 30, 1996] FINANCIAL GUARANTY INSURANCE COMPANY - ------------------------------------------------------------------------------- Unaudited Interim Financial Statements September 30, 1996 Balance Sheets 1 Statements of Income 2 Statements of Cash Flows 3 Notes to Unaudited Interim Financial Statements. 4 See accompanying notes to interim financial statements Financial Guaranty Insurance Company Balance Sheets - -------------------------------------------------------------------------------- ($ in Thousands)
September December 31, 30, 1996 1995 --------------------- --------------------- (unaudited) Assets (Unaudited) Fixed maturity securities, available for sale, at fair value (amortized cost of $2,153,856 in 1996 and $2,043,453 in 1995) $2,172,841 $2,141,584 Short-term investments, at cost, which approximates market 147,460 91,032 Cash 997 199 Accrued investment income 33,825 37,347 Reinsurance receivable 7,418 7,672 Deferred policy acquisition costs 93,676 94,868 Property, plant and equipment net of accumulated depreciation of $14,704 in 1996 and $12,861 in 1995 5,032 6,314 Prepaid reinsurance premiums 159,506 162,087 Prepaid expenses and other assets 28,581 39,199 ---------- ---------- Total assets $2,649,336 $2,580,302 ========== ========== Liabilities and Stockholder's Equity Liabilities: Unearned premiums $ 685,364 $ 727,535 Losses and loss adjustment expenses 72,127 77,808 Ceded reinsurance payable 12,507 1,942 Accounts payable and accrued expenses 48,382 32,811 Due to parent 260 1,647 Current federal income taxes payable 78,818 51,296 Deferred federal income taxes payable 74,195 99,171 Payable for securities purchased 45,796 40,211 ---------- ---------- Total liabilities 1,017,449 1,032,421 ---------- ---------- Stockholder's Equity: Common stock, par value $1,500 per share at September 30, 1996 and at December 31, 1995: 10,000 shares authorized, issued and outstanding 15,000 15,000 Additional paid-in capital 334,011 334,011 Net unrealized gains on fixed maturity securities available for sale, net of tax 12,340 63,785 Foreign currency translation adjustment (2,296) (1,499) Retained earnings 1,272,832 1,136,584 ---------- ---------- Total stockholder's equity 1,631,887 1,547,881 ---------- --------- Total liabilities and stockholder's equity $2,649,336 $2,580,302 ========== ==========
See accompanying notes to interim financial statements -1- Financial Guaranty Insurance Company Statements of Income - ------------------------------------------------------------------------------- ($ in Thousands)
Nine Months Ended September 30, 1996 1995 ------------- ------------- (Unaudited) Revenues: Gross premiums written $ 65,875 $ 66,151 Ceded premiums (14,178) (14,430) ---------- ---------- Net premiums written 51,697 51,721 Decrease in net unearned premiums 39,589 29,428 --------- ---------- Net premiums earned 91,286 81,149 Net investment income 92,957 89,716 Net realized gains 11,132 19,574 --------- ---------- Total revenues 195,375 190,439 Expenses: Losses and loss adjustment expenses (2,078) 1,191 Policy acquisition costs 13,056 9,013 Other underwriting expenses 10,582 14,925 ---------- --------- Total expenses 21,560 25,129 --------- --------- Income before provision for federal income taxes 173,815 165,310 Provision for federal income taxes 37,566 33,323 --------- --------- Net income $136,249 $131,987 ======== ========
See accompanying notes to interim financial statements -2- Financial Guaranty Insurance Company Statements of Cash Flow - ------------------------------------------------------------------------------- ($ in Thousands)
Nine Months Ended September 30, 1996 1995 ----------------- ----------------- (Unaudited) Operating activities Operating activities: Net income $ 136,249 $ 131,987 Adjustments to reconcile net income to net cash provided by operating activities: Provision for deferred income taxes 3,155 14,917 Amortization of fixed maturity securities 606 2,064 Policy acquisition costs deferred (11,864) (14,213) Amortization of deferred policy acquisition costs 13,056 8,787 Depreciation of fixed assets 1,843 1,686 Change in reinsurance receivable 254 4,574 Change in prepaid reinsurance premiums 2,581 2,930 Foreign currency translation adjustment (1,226) (923) Change in accrued investment income, prepaid expenses and other assets 14,140 (969) Change in unearned premiums (42,171) (32,359) Change in losses and loss adjustment expense reserves (5,681) (6,439) Change in other liabilities 24,749 (6,673) Change in current income taxes payable 27,522 (4,294) Net realized gains on investments (11,132) (19,574) --------- --------- Net cash provided by operating activities 152,081 81,501 --------- --------- Investing activities: Sales or maturities of fixed maturity securities 633,347 622,658 Purchases of fixed maturity securities (727,641) (651,424) Sales or maturities (purchases) of short-term investments, net (56,428) (46,053) Purchases of property and equipment, net (561) (449) --------- --------- Net cash used for investing activities (151,283) (75,268) --------- --------- Increase in cash 798 6,233 Cash at beginning of period 199 1,766 --------- --------- Cash at end of period $ 997 $ 7,999 ========= =========
See accompanying notes to interim financial statements -3- Financial Guaranty Insurance Company Notes to Financial Statements - ------------------------------------------------------------------------------- September 30, 1996 and 1995 (Unaudited) (1) Basis of Presentation The interim financial statements of Financial Guaranty Insurance Company (the Company) in this report reflect all adjustments necessary, in the opinion of management, for a fair statement of (a) results of operations for the nine months ended September 30, 1996 and 1995, (b) the financial position at September 30, 1996 and December 31, 1995, and (c) cash flows for the nine months ended September 30, 1996 and 1995. These interim financial statements should be read in conjunction with the financial statements and related notes included in the 1995 audited financial statements. The 1995 financial statements have been reclassified to conform to the 1996 presentation. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that effect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) Statutory Accounting Practices The financial statements are prepared on the basis of GAAP, which differs in certain respects from accounting practices prescribed or permitted by state insurance regulatory authorities. The following are the significant ways in which statutory basis accounting practices differ from GAAP: (a) premiums are earned in proportion to the reduction of the related risk rather than in proportion to the coverage provided; (b) policy acquisition costs are charged to current operations as incurred rather than as related premiums are earned; (c) a contingency reserve is computed on the basis of statutory requirements for the security of all policyholders, regardless of whether loss contingencies actually exist, whereas under GAAP, a reserve is established based on an ultimate estimate of exposure; (d) certain assets designated as "non-admitted assets" are charged directly against surplus but are reflected as assets under GAAP, if recoverable; (e) federal income taxes are only provided with respect to taxable income for which income taxes are currently payable, while under GAAP taxes are also provided for differences between the financial reporting and tax bases of assets and liabilities; (f) purchases of tax and loss bonds are reflected as admitted assets, while under GAAP they are recorded as federal income tax payments; and (g) all fixed income investments are carried at amortized cost, rather than at fair value for securities classified as "Available for Sale" under GAAP. -4- Financial Guaranty Insurance Company Notes to Financial Statements - -------------------------------------------------------------------------------- The following is a reconciliation of the net income and stockholder's equity of Financial Guaranty prepared on a GAAP basis to the corresponding amounts reported on a statutory basis for the periods indicated below:
Nine Months Ended September 30, ------------------------------------------------------------------ (unaudited) 1996 1995 ----------------------------- ---------------------------- Net Stockholder's Net Stockholder's Income Equity Income Equity ------ ------------- ------ -------------- GAAP basis amount $136,249 $1,631,887 $131,987 $1,487,346 Premium revenue recognition (6,742) (173,669) (15,432) (159,804) Deferral of acquisition costs 1,192 (93,676) (5,426) (96,354) Contingency reserve - (428,798) - (372,683) Non-admitted assets - (4,314) - (6,084) Case-basis losses incurred and salvage recoverable (3,854) (3,906) 1,586 (2,514) Portfolio loss reserves - 24,000 (10,900) 35,200 Deferral of income tax 3,155 67,550 14,917 59,728 Unrealized gains on fixed maturity securities held at fair value, net of taxes - (12,340) - (34,463) Profit commission 1,234 (4,510) 5,228 (3,613) Contingency reserve tax deduction - 85,087 - 78,196 Provision for unauthorized reinsurance - - - (266) Allocation of tax benefits due to Parent's net operating loss to the Company (2) 10,289 118 9,772 ---------- ------------- ------------ ----------- Statutory basis amount $131,232 $1,097,600 $122,078 $994,461 ========== ============= ============ ============
-5- Financial Guaranty Insurance Company Notes to Financial Statements - -------------------------------------------------------------------------------- September 30, 1996 and 1995 (Unaudited) (3) Dividends Under New York Insurance Law, the Company may pay a dividend only from earned surplus subject to the following limitations: Statutory surplus after dividends may not be less than the minimum required paid-in capital, which was $2,100,000 in 1996. Dividends may not exceed the lesser of 10 percent of its surplus or 100 percent of adjusted net investment income, as defined therein, for the twelve month period ending on the preceding December 31, without the prior approval of the Superintendent of the New York State Insurance Department. The amount of the Company's surplus available for dividends at September 30,1996 is approximately $109.8 million. (4) Income Taxes The Company's effective Federal corporate tax rate (21.6 percent and 20.2 percent for the nine months ended September 30, 1996 and 1995, respectively) is less than the statutory corporate tax rate (35 percent in 1996 and 1995) on ordinary income due to permanent differences between financial and taxable income, principally tax-exempt interest. (5) Reinsurance In accordance with Statement of Financial Accounting Standards No. 113 ("SFAS 113"), "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", adopted in 1993, the Company reports assets and liabilities relating to reinsured contracts gross of the effects of reinsurance. Net premiums earned are shown net of premiums ceded of $16.8 million and $17.1 million, respectively, for the nine months ended September 30, 1996 and 1995. -6- EXHIBIT A Approved financial information As of September 30, 1996 As of September 30, 1996, December 31, 1995 and 1994 the Certificate Insurer had written directly or assumed through reinsurance, guaranties of approximately $197.8 billion, $180.0 billion and $160.2 billion par value of securities, respectively (of which approximately 86 percent, 88 percent and 89 percent constituted guaranties of municipal bonds), for which it had collected gross premiums of approximately $2.01 billion, $1.95 billion and $1.78 billion, respectively. As of September 30, 1996, the Certificate Insurer had reinsured approximately 18 percent of the risks it had written, 34 percent through quota share reinsurance and 66 percent through facultative arrangements. Capitalization The following table sets forth the capitalization of the Certificate Insurer as of December 31, 1994, December 31, 1995 and September 30, 1996, respectively, on the basis of generally accepted accounting principles. No material adverse change in the capitalization of the Certificate Insurer has occurred since September 30, 1996. (Unaudited)
December 31, December 31, September 30, 1994 1995 1996 (in millions) (in Millions) (in Millions) ------------- ------------- ------------- Unearned Premiums $757 $728 $685 Other Liabilities 261 304 332 Stockholder's Equity Common Stock 15 15 15 Additional Paid-in Capital 334 334 334 Unrealized gains (losses) (42) 64 12 Foreign currency translation adjustment (1) (2) (2) Retained Earnings 974 1,137 1,273 ---------- ---------- ---------- Total Stockholder's Equity 1,280 1,548 1,632 ---------- ---------- ---------- Total Liabilities and Stockholder's Equity $2,298 $2,580 $2,649 ---------- ---------- ---------- ---------- ---------- ----------
For further financial information concerning the Certificate Insurer, see the audited financial statements of the Certificate Insurer included as Appendix A and the unaudited interim financial statements of the Certificate Insurer included as Appendix B. Copies of the Certificate Insurer's quarterly and annual statutory statements filed by the Certificate Insurer with the New York Insurance Department are available upon request to Financial Guaranty Insurance Company, 115 Broadway, New York, New York 10006, Attention: Corporate Communications Department. The Certificate Insurer's telephone number is (212) 312-3000. The Certificate Insurer does not accept any responsibility for the accuracy or completeness of this Prospectus or any information or disclosure contained herein, or omitted herefrom, other than with respect to the accuracy of information regarding the Certificate Insurer and the Certificate Insurance Policy set forth under the headings "The Certificate Insurance Policy" and "The Certificate Insurer" and in Appendix A and Appendix B. PROSPECTUS MORTGAGE LOAN ASSET-BACKED SECURITIES, ISSUABLE IN SERIES ADVANTA ADVANTA MORTGAGE CONDUIT SERVICES, INC. Sponsor of the Trusts ADVANTA ADVANTA MORTGAGE CORP. USA Master Servicer This Prospectus describes certain Mortgage Loan Asset-Backed Securities (the 'Securities') that may be issued from time to time in series and certain classes of which may be offered hereby from time to time as described in the related Prospectus Supplement. Each series of Securities will be issued by a separate trust (each, a 'Trust'). The primary assets of each Trust will consist of a segregated pool (a 'Mortgage Pool') of conventional one- to four-family residential mortgage loans, multi-family residential mortgage loans, mixed use mortgage loans, revolving home equity loans or certain balances thereof secured by mortgages primarily on one-to-four-family residential properties, or certificates of interest or participation therein (collectively, the 'Mortgage Loans'), to be acquired by such Trust from Advanta Mortgage Conduit Services, Inc. (the 'Sponsor'). The Sponsor will acquire the Mortgage Loans from one or more affiliated or unaffiliated institutions (the 'Originators'). In connection with the establishment of certain Trusts the Sponsor may first transfer the related Trust Estate to Advanta Mortgage Receivables Inc. (the 'Transferor') and the Transferor will then transfer such Trust Estate to the related Trust. The use of the Transferor will not affect the obligations of the Sponsor with respect to the related Trust or the related Securities. If the Transferor is to be involved in a particular offering the related Prospectus Supplement will describe its role in such offering; for purposes of this Prospectus the role of the Transferor is subsumed in the role of the Sponsor. See 'The Mortgage Pools.' The Mortgage Loans in each Mortgage Pool and certain other assets described herein and in the related Prospectus Supplement (collectively with respect to each Trust, the 'Trust Estate') and in the related Prospectus Supplement will be held by the related Trust for the benefit of the holders of the related series of Securities (the 'Securityholders') pursuant to a Pooling and Servicing Agreement to the extent and as more fully described herein and in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, each Mortgage Pool will consist of one or more of the various types of Mortgage Loans described under 'The Mortgage Pools.' (Cover continued on next page) ------------------------ THE ASSETS OF THE RELATED TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE SPONSOR, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS SUPPLEMENT. NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE LOANS WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE SPONSOR, THE MASTER SERVICER, ANY ORIGINATOR OR ANY OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT. SEE ALSO 'RISK FACTORS' PAGE 13. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ Offers of the Securities may be made through one or more different methods, including offerings through underwriters, as more fully described under 'Methods of Distribution' and in the related Prospectus Supplement. There will be no secondary market for any series of Securities prior to the offering thereof. There can be no assurance that a secondary market for any of the Securities will develop or, if it does develop, that it will offer sufficient liquidity of investment or will continue. Retain this Prospectus for future reference. This Prospectus may not be used to consummate sales of securities offered hereby unless accompanied by a Prospectus Supplement. ------------------------ The date of this Prospectus is September 6, 1996. (Cover continued from previous page) Each series of Securities will include one or more classes. The Securities of any particular class may represent beneficial ownership interests in the related Mortgage Loans held by the related Trust, or may represent debt secured by such Mortgage Loans, as described herein and in the related Prospectus Supplement. A series may include one or more classes of Securities entitled to principal distributions, with disproportionate, nominal or no interest distributions, or to interest distributions, with disproportionate, nominal or no principal distributions. The rights of one or more classes of Securities of any series may be senior or subordinate to the rights of one or more of the other classes of Securities. A series may include two or more classes of Securities which differ as to the timing, sequential order, priority of payment, interest rate or amount of distributions of principal or interest or both. Information regarding each class of Securities of a series, and certain characteristics of the Mortgage Loans to be evidenced by such Securities, will be set forth in the related Prospectus Supplement. THE SPONSOR'S AND THE RELATED ORIGINATORS' ONLY OBLIGATIONS WITH RESPECT TO A SERIES OF SECURITIES WILL BE PURSUANT TO THE SERVICING REQUIREMENTS RELATING THERETO, AND PURSUANT TO CERTAIN REPRESENTATIONS AND WARRANTIES MADE BY THE SPONSOR OR BY SUCH ORIGINATORS, EXCEPT AS OTHERWISE DESCRIBED IN THE RELATED PROSPECTUS SUPPLEMENT. THE PROSPECTUS SUPPLEMENT FOR EACH SERIES OF SECURITIES WILL NAME ADVANTA MORTGAGE CORP. USA AS MASTER SERVICER (THE 'MASTER SERVICER') WHICH WILL ACT, DIRECTLY OR THROUGH ONE OR MORE SUBSERVICERS (THE 'SUBSERVICER(S)'). THE PRINCIPAL OBLIGATIONS OF THE MASTER SERVICER WILL BE PURSUANT TO ITS CONTRACTUAL SERVICING OBLIGATIONS (WHICH MAY INCLUDE A LIMITED OBLIGATION TO MAKE CERTAIN ADVANCES IN THE EVENT OF DELINQUENCIES IN PAYMENTS ON THE MORTGAGE LOANS AND INTEREST SHORTFALLS DUE TO PREPAYMENT OF MORTGAGE LOANS). SEE 'DESCRIPTION OF THE SECURITIES.' If so specified in the related Prospectus Supplement, the Trust Estate for a series of Securities may include any combination of a mortgage pool insurance policy, letter of credit, financial guaranty insurance policy, bankruptcy bond, special hazard insurance policy, reserve fund or other form of Credit Enhancement. In addition to or in lieu of the foregoing, Credit Enhancement with respect to certain classes of Securities of any series may be provided by means of subordination, cross-support among Mortgage Assets, as defined herein, or over-collateralization. See 'Description of Credit Enhancement.' The rate of payment of principal of each class of Securities entitled to principal payments will depend on the priority of payment of such class and the rate of payment (including prepayments, defaults, liquidations and repurchases of Mortgage Loans) of the related Mortgage Loans. A rate of principal payment lower or higher than that anticipated may affect the yield on each class of Securities in the manner described herein and in the related Prospectus Supplement. The various types of Securities, the different classes of such Securities and certain types of Mortgage Loans in a given Mortgage Pool may have different prepayment risks and credit risks. The Prospectus Supplement for a series of Securities or the related Current Report on Form 8-K will contain information as to (i) types, maturities and certain statistical information relating to credit risks of the Mortgage Loans in the related Mortgage Pool, (ii) the effect of certain rates of prepayment, based upon certain specified assumptions for a series of Securities and (iii) priority of payment and maturity dates of the Securities. AN INVESTOR SHOULD CAREFULLY REVIEW THE INFORMATION IN THE RELATED PROSPECTUS SUPPLEMENT CONCERNING THE DIFFERENT CONSEQUENCES OF THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES OF SECURITIES. See 'Yield Considerations.' A Trust may be subject to early termination under the circumstances described herein and in the related Prospectus Supplement. One or more separate elections may be made to treat a Trust, or one or more segregated pools of assets held by such Trust, as a real estate mortgage investment conduit ('REMIC') for federal income tax purposes. If applicable, the Prospectus Supplement for a series of Securities will specify which class or classes of the related series of Securities will be considered to be regular interests in a REMIC and which classes of Securities or other interests will be designated as the residual interest in a REMIC. Alternatively, a Trust may be treated as a grantor trust or as a partnership for federal income tax purposes, or may be treated for federal income tax purposes as a mere security device which constitutes a collateral arrangement for the issuance of secured debt. See 'Certain Federal Income Tax Consequences' herein. 2 No dealer, salesman, or any other person has been authorized to give any information, or to make any representations, other than those contained in this Prospectus or the related Prospectus Supplement, and, if given or made, such information must not be relied upon as having been authorized by the Company or any dealer, salesman, or any other person. Neither the delivery of this Prospectus or the related Prospectus Supplement nor any sale made hereunder or thereunder shall under any circumstances create an implication that there has been no change in the information herein or therein since the date hereof. This Prospectus and the related Prospectus Supplement are not an offer to sell or a solicitation of an offer to buy any security in any jurisdiction in which it is unlawful to make such offer or solicitation. TABLE OF CONTENTS
CAPTION PAGE - ------- ---- Summary of Prospectus................................................. 4 Risk Factors.......................................................... 13 Risks of the Mortgage Loans....................................... 14 The Trusts............................................................ 18 The Mortgage Pools.................................................... 25 General........................................................... 25 The Mortgage Pools................................................ 25 Mortgage Loan Program................................................. 27 Underwriting Guidelines........................................... 28 Qualifications of Originators..................................... 31 Sub-Servicers..................................................... 32 Representations by Originators.................................... 32 Sub-Servicing by Originators...................................... 33 Description of the Securities......................................... 35 General........................................................... 35 Form of Securities................................................ 37 Assignment of Mortgage Loans...................................... 38 Forward Commitments; Pre-Funding.................................. 39 Payments on Mortgage Loans; Deposits to Distribution Account...... 40 Withdrawals from the Principal and Interest Account............... 43 Distributions..................................................... 43 Principal and Interest on the Securities.......................... 44 Advances.......................................................... 45 Reports to Securityholders........................................ 46 Collection and Other Servicing Procedures......................... 47 Realization Upon Defaulted Mortgage Loans......................... 48 Subordination......................................................... 49 Description of Credit Enhancement..................................... 50 Hazard Insurance; Claims Thereunder................................... 55 Hazard Insurance Policies......................................... 55 The Sponsor and the Transferor........................................ 55 The Master Servicer................................................... 56 The Pooling and Servicing Agreement................................... 56 Servicing and Other Compensation and Payment of Expenses; Originator's Retained Yield..................................... 56 Evidence as to Compliance......................................... 57 Removal and Resignation of the Master Servicer.................... 57 Amendments........................................................ 58 CAPTION PAGE - ------- ---- Termination; Retirement of Securities............................. 59 The Trustee....................................................... 59 Yield Considerations.................................................. 62 Maturity and Prepayment Considerations................................ 63 Certain Legal Aspects of Mortgage Loans and Related Matters........... 65 General........................................................... 65 Cooperative Loans................................................. 66 Foreclosure....................................................... 67 Foreclosure on Shares of Cooperatives............................. 67 Rights of Redemption.............................................. 68 Anti-Deficiency Legislation and Other Limitations on Lenders...... 68 Environmental Legislation......................................... 69 Enforceability of Certain Provisions.............................. 70 Certain Provisions of California Deeds of Trust................... 70 Applicability of Usury Laws....................................... 71 Alternative Mortgage Instruments.................................. 71 Soldiers' and Sailors' Civil Relief Act of 1940................... 72 Certain Federal Income Tax Consequences............................... 72 General........................................................... 72 Grantor Trust Securities.......................................... 72 REMIC Securities.................................................. 74 Debt Securities................................................... 80 Discount and Premium.............................................. 81 Backup Withholding................................................ 83 Foreign Investors................................................. 84 ERISA Considerations.................................................. 84 Plan Asset Regulations............................................ 85 Prohibited Transaction Class Exemption............................ 85 Tax Exempt Investors.............................................. 87 Consultation With Counsel......................................... 87 Legal Investment Matters.............................................. 87 Use of Proceeds....................................................... 88 Methods of Distribution............................................... 88 Legal Matters......................................................... 89 Financial Information................................................. 89 Additional Information................................................ 89 Index of Principal Definitions........................................ 90
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS EFFECTING TRANSACTIONS IN THE RELATED SECURITIES, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION THEREOF, MAY BE REQUIRED TO DELIVER THIS PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. 3 SUMMARY OF PROSPECTUS The following summary of certain pertinent information is qualified in its entirety by reference to the detailed information appearing elsewhere in this Prospectus and by reference to the information with respect to each series of Securities contained in the Prospectus Supplement to be prepared and delivered in connection with the offering of such series. Capitalized terms used in this summary that are not otherwise defined shall have the meanings ascribed thereto in this Prospectus. An index indicating where certain terms used herein are defined appears at the end of this Prospectus. Securities Offered........... Mortgage Loan Asset-Backed Securities. Sponsor............. Advanta Mortgage Conduit Services, Inc. See 'The Sponsor and The Transferor.' Originators......... The Sponsor will acquire the Mortgage Loans from one or more institutions affiliated with the Sponsor ('Affiliated Originators') or institutions unaffiliated with the Sponsor ('Unaffiliated Originators') (the Affiliated Originators and the Unaffiliated Originators are collectively referred to as the 'Originators'). The Sponsor will transfer the related Trust Estate to the related Trust. In connection with the establishment of certain Trusts the Sponsor may first transfer the related Trust Estate to the Transferor and the Transferor will then transfer such Trust Estate to the related Trust. The use of the Transferor will not affect the obligations of the Sponsor with respect to the related Trust or the related Securities. If the Transferor is to be involved in a particular offering the related Prospectus Supplement will describe its role in such offering; for purposes of this Prospectus the role of the Transferor is subsumed in the role of the Sponsor. Master Servicer..... Advanta Mortgage Corp. USA. See 'The Master Servicer' and 'The Pooling and Servicing Agreement--Removal and Resignation of the Master Servicer.' Sub-Servicers....... Originators may act as Sub-Servicers for Mortgage Loans acquired by the Sponsor from such Originators unless all servicing duties relating to such Mortgage Loans have been transferred to the Master Servicer or to a third-party, unaffiliated contract servicer approved by the Master Servicer. See 'Mortgage Loan Pro- gram--Sub-Servicers.' Trustee............. The trustee (the 'Trustee') for each series of Securities will be specified in the related Prospectus Supplement. The Securities...... Issuance of Securities. Each series of Securities will be issued at the direction of the Sponsor by a separate Trust (each, a 'Trust'). The primary assets of each Trust will consist of a segregated pool (each, a 'Mortgage Pool') of conventional, one- to four-family residential mortgage loans or multi-family residential mortgage loans (the 'Mortgage Loans') or certificates of interest or participation therein, acquired by such Trust from the Sponsor. The Sponsor will acquire the Mortgage Loans from one or more of the Originators. The Securities issued by any Trust may represent beneficial ownership interests in the related Mortgage Loans held by the related Trust, or may represent debt secured by such Mortgage Loans, as described herein and in the related Prospectus Supplement. Securities which represent beneficial ownership interests in the related
4 Trust will be referred to as 'Certificates' in the related Prospectus Supplement; Securities which represent debt issued by the related Trust will be referred to as 'Notes' in the related Prospectus Supplement. Each Trust will be established pursuant to an agreement (each, a 'Trust Agreement') by and between the Sponsor and the Trustee named therein. Each Trust Agreement will describe the related pool of assets to be held in trust (each such asset pool, the 'Trust Estate'), which will include the related Mortgage Loans and, if so specified in the related Prospectus Supplement, may include any combination of a mortgage pool insurance policy, letter of credit, financial guaranty insurance policy, special hazard policy, reserve fund or other form of Credit Enhancement. The Mortgage Loans held by each Trust will be master serviced by the Master Servicer pursuant to a servicing agreement (each, a 'Servicing Agreement') by and between the Master Servicer and the related Trustee. With respect to Securities that represent debt issued by the related Trust, the related Trust will enter into an indenture (each, an 'Indenture') by and between such Trust and the trustee named on such Indenture (the 'Indenture Trustee'), as set forth in the related Prospectus Supplement. Securities that represent beneficial ownership interests in the related Trust will be issued pursuant to the related Trust Agreement. In the case of any individual Trust, the contractual arrangements relating to the establishment of the Trust, the servicing of the related Mortgage Loans and the issuance of the related Securities may be contained in a single agreement, or in several agreements which combine certain aspects of the Trust Agreement, the Servicing Agreement and the Indenture described above (for example, a pooling and servicing agreement, or a servicing and collateral management agreement). For purposes of this Prospectus, the term 'Pooling and Servicing Agreement' as used with respect to a Trust means, collectively, and except as otherwise specified, any and all agreements relating to the establishment of the related Trust, the servicing of the related Mortgage Loans and the issuance of the related Securities. Securities Will Be Recourse to the Assets of the Related Trust Only. The sole source of payment for any series of Securities will be the assets of the related Trust (i.e., the related Trust Estate). The Securities will not be obligations, either recourse or non-recourse (except for certain non-recourse debt described under 'Certain Federal Income Tax Consequences'), of the Sponsor, the Master Servicer, any Sub-Servicer, any Originator or any Person other than the related Trust. In the case of Securities that represent beneficial ownership interest in the related Trust Estate, such Securities will represent the ownership of such Trust Estate; with respect to Securities that represent debt issued by the related Trust, such Securities will be secured by the related Trust Estate. Notwithstanding the foregoing, and as to be described in the related Prospectus Supplement, certain types of Credit Enhancement, such as a financial guaranty insurance policy or a letter of
5 credit, may constitute a full recourse obligation of the issuer of such Credit Enhancement. General Nature of the Securities as Investments. The Securities will consist of two basic types: (i) Securities of the fixed-income type ('Fixed-Income Securities') and (ii) Securities of the equity participation type ('Equity Securities'). No Class of Equity Securities will be offered pursuant to this Prospectus or any Prospectus Supplement related hereto. Fixed-Income Securities will generally be styled as debt instruments, having a principal balance and a specified interest rate ('Interest Rate'). Fixed-Income Securities may be either benefi- cial ownership interests in the related Mortgage Loans held by the related Trust, or may represent debt secured by such Mortgage Loans. Each series or class of Fixed-Income Securities may have a different Interest Rate, which may be a fixed or adjustable Interest Rate. The related Prospectus Supplement will specify the Interest Rate for each series or class of Fixed-Income Securities, or the initial Interest Rate and the method for determining subsequent changes to the Interest Rate. A series may include one or more classes of Fixed-Income Securities ('Strip Securities') entitled (i) to principal distributions, with disproportionate, nominal or no interest distributions, or (ii) to interest distributions, with disproportionate, nominal or no principal distributions. In addition, a series may include two or more classes of Fixed-Income Securities that differ as to timing, sequential order, priority of payment, Interest Rate or amount of distributions of principal or interest or both, or as to which distributions of principal or interest or both on any class may be made upon the occurrence of specified events, in accordance with a schedule or formula, or on the basis of collections from designated portions of the related Mortgage Pool, which series may include one or more classes of Fixed-Income Securities ('Accrual Securities'), as to which certain accrued interest will not be distributed but rather will be added to the principal balance (or nominal principal balance, in the case of Accrual Securities which are also Strip Securities) thereof on each Payment Date, as hereinafter defined and in the manner described in the related Prospectus Supplement. If so provided in the related Prospectus Supplement, a series of Securities may include one or more other classes of Fixed-Income Securities (collectively, the 'Senior Securities') that are senior to one or more other classes of Fixed-Income Securities (collectively, the 'Subordinate Securities') in respect of certain distributions of principal and interest and allocations of losses on Mortgage Loans. In addition, certain classes of Senior (or Subordinate) Securities may be senior to other classes of Senior (or Subordinate) Securities in respect of such distributions or losses. Equity Securities will represent the right to receive the proceeds of the related Trust Estate after all required payments have been made to the Securityholders of the related Fixed-Income Securities (both Senior Securities and Subordinate Securities), and following any required deposits to any reserve account which may
6 be established for the benefit of the Fixed-Income Securities. Equity Securities may constitute what are commonly referred to as the 'residual interest,' 'seller's interest' or the 'general partnership interest,' depending upon the treatment of the related Trust for federal income tax purposes. As distinguished from the Fixed-Income Securities, the Equity Securities will not be styled as having principal and interest components. Any losses suffered by the related Trust will first be absorbed by the related class of Equity Securities, as described herein and in the related Prospectus Supplement. No Class of Equity Securities will be offered pursuant to this Prospectus or any Prospectus Supplement related hereto. Equity Securities may be offered on a private placement basis or pursuant to a separate Registration Statement to be filed by the Sponsor. In addition, the Sponsor and its affiliates may initially or permanently hold any Equity Securities issued by any Trust. General Payment Terms of Securities. As provided in the related Pooling and Servicing Agreement and as described in the related Prospectus Supplement, Securityholders will be entitled to receive payments on their Securities on specified dates (each, a 'Payment Date'). Payment Dates with respect to Fixed-Income Securities will occur monthly, quarterly or semi-annually, as described in the related Prospectus Supplement; Payment Dates with respect to Equity Securities will occur as described in the related Prospectus Supplement. The related Prospectus Supplement will describe a date (the 'Record Date') preceding such Payment Date, as of which the Trustee or its paying agent will fix the identity of the Securi- tyholders for the purpose of receiving payments on the next succeeding Payment Date. Unless otherwise described in the related Prospectus Supplement, the Payment Date will be the twenty-fifth day of each month (or, in the case of quarterly-pay Securities, the twenty-fifth day of every third month; and in the case of semi-annual pay Securities, the twenty-fifth day of every sixth month) and the Record Date will be the close of business as of the last day of the calendar month that precedes the calendar month in which such Payment Date occurs. Each Pooling and Servicing Agreement will describe a period (each, a 'Remittance Period') antecedent to each Payment Date (for example, in the case of monthly-pay Securities, the calendar month preceding the month in which a Payment Date occurs or such other specified period). Unless otherwise provided in the related Prospectus Supplement, collections received on or with respect to the related Mortgage Loans during a Remittance Period will be required to be remitted by the Master Servicer to the related Trustee prior to the related Payment Date and will be used to fund payments to Securityholders on such Payment Date. As may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of the principal collected on or with respect to the related Mortgage Loans may be applied by the related Trustee to the acquisition of additional Mortgage Loans during a specified period (rather than be used to fund payments of principal to
7 Securityholders during such period) with the result that the related securities will possess an interest-only period, also commonly referred to as a revolving period, which will be followed by an amortization period. Any such interest-only or revolving period may, upon the occurrence of certain events to be described in the related Prospectus Supplement, terminate prior to the end of the specified period and result in the earlier than expected amortiza- tion of the related Securities. In addition, and as may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of such collected principal may be retained by the Trustee (and held in certain temporary investments, including Mortgage Loans) for a specified period prior to being used to fund payments of principal to Securityholders. The result of such retention and temporary investment by the Trustee of such principal would be to slow the amortization rate of the related Securities relative to the amortization rate of the related Mortgage Loans, or to attempt to match the amortization rate of the related Securities to an amortization schedule established at the time such Securities are issued. Any such feature applicable to any Securities may terminate upon the occurrence of events to be described in the related Prospectus Supplement, resulting in the current distribution of principal payments to the specified Securityholders and an acceleration of the amortization of such Securities. Unless otherwise specified in the related Prospectus Supplement, neither the Securities nor the underlying Mortgage Loans will be guaranteed or insured by any governmental agency or instrumentality or the Sponsor, the Master Servicer, any Sub-Servicer, any Originator or any of their affiliates. No Investment Companies......... Neither the Sponsor nor any Trust will register as an 'investment company' under the Investment Company Act of 1940, as amended (the 'Investment Company Act'). Cross- Collateralization... Unless otherwise provided in the related Pooling and Servicing Agreement and described in the related Prospectus Supplement, the source of payment for Securities of each series will be the assets of the related Trust Estate only. However, as may be described in the related Prospectus Supplement, a Trust Estate may include the right to receive moneys from a common pool of Credit Enhancement which may be available for more than one series of Securities, such as a master reserve account or a master insurance policy. Notwithstanding the foregoing, unless specifically described otherwise in the related Prospectus Supplement, no collections on any Mortgage Loans held by any Trust may be applied to the payment of Securities issued by any other Trust (except to the limited extent that certain collections in excess of amounts needed to pay the related Securities may be deposited in a common, master reserve account that provides Credit Enhance- ment for more than one series of Securities). The Mortgage Pools............. Unless otherwise specified in the related Prospectus Supplement, each Trust Estate will consist primarily of Mortgage Loans secured by liens on one- to four-family residential or multi-family properties ('Mortgages'), located in any one of the fifty states,
8 the District of Columbia, Puerto Rico or any other Territories of the United States. All Mortgage Loans will have been acquired by the related Trust from the Sponsor. All Mortgage Loans will have been originated either by (x) one or more institutions affiliated with the Sponsor (such affiliated institutions, the 'Affiliated Originators') or (y) one or more institutions not affiliated with the Sponsor (such unaffiliated institutions, the 'Unaffiliated Originators'). The Mortgage Loans originated by the Affiliated Originators generally will have been originated pursuant to the standard underwriting guidelines (the 'Sponsor's Guidelines') set forth in the Sponsor's guide for originators (the 'Sponsor's Originator Guide'), as modified from time to time. The Mortgage Loans originated by the Unaffiliated Originators may be originated either (i) generally pursuant to the Sponsor's Guidelines; (ii) generally pursuant to such Unaffiliated Originators' underwriting guidelines as approved by the Sponsor ('Approved Guidelines'); or (iii) generally pursuant to such Originators' underwriting guidelines and purchased by the Sponsor in a bulk acquisition ('Bulk Acquisition'). See 'Mortgage Loan Pro- gram.' For a description of the types of Mortgage Loans that may be included in the Mortgage Pools, see 'The Mortgage Pools--The Mortgage Loans.' A Current Report on Form 8-K will be available to purchasers or underwriters of the related series of Securities and will generally be filed, together with the related Pooling and Servicing Agreement, with the Securities and Exchange Commission within fifteen days after the initial issuance of such series. Forward Commitments; Pre-Funding....... A Trust may enter into an agreement (each, a 'Forward Purchase Agreement') with the Sponsor whereby the Sponsor will agree to transfer additional Mortgage Loans (the 'Subsequent Mortgage Loans') to such Trust following the date on which such Trust is established and the related Securities are issued. Any Forward Purchase Agreement will require that any Mortgage Loans so transferred to a Trust conform to the requirements specified in such Forward Purchase Agreement. In addition, the Forward Purchase Agreement states that the Depositor shall only transfer the Subsequent Mortgage Loans upon the satisfaction of certain conditions including that the Depositor shall have delivered to the Certificate Insurer, the Rating Agencies and the Trustee opinions of counsel (including bankruptcy, corporate and tax opinions) with respect to the transfer of the Subsequent Mortgage Loans. If a Forward Purchase Agreement is to be utilized, and unless other- wise specified in the related Prospectus Supplement, the related Trustee will be required to deposit in a segregated account (each, a 'Pre-Funding Account') all or a portion of the proceeds received by the Trustee in connection with the sale of one or more classes of Securities of the related series; subsequently, the additional Mortgage Loans will be transferred to the related Trust in exchange for money released to the Sponsor from the related Pre-Funding Account in one or more transfers. Each Forward Purchase Agreement will set a specified period during which any such transfers must occur. The Forward Purchase Agreement or the related Pooling and Servicing Agreement will require that, if
9 all moneys originally deposited to such Pre-Funding Account are not so used by the end of such specified period, then any remaining moneys will be applied as a mandatory prepayment of the related class or classes of Securities as specified in the related Prospectus Supplement. Credit Enhancement....... If so specified in the Prospectus Supplement, the Trust Estate with respect to any series of Securities may include any one or any combination of a letter of credit, mortgage pool insurance policy, special hazard insurance policy, bankruptcy bond, financial guaranty insurance policy, reserve fund or other type of Credit Enhancement to provide full or partial coverage for certain defaults and losses relating to the Mortgage Loans. Credit support also may be provided in the form of the related class of Equity Securities, and/or by subordination of one or more classes of Fixed-Income Securities in a series under which losses in excess of those absorbed by any related class of Equity Securities are first allocated to any Subordinate Securities up to a specified limit, cross-support among groups of Mortgage Assets or overcollateralization. Unless otherwise specified in the related Prospectus Supplement, any mortgage pool insurance policy will have certain exclusions from coverage thereunder, which will be described in the related Prospectus Supplement, which may be accompanied by one or more separate Credit Enhancements that may be obtained to cover certain of such exclusions. To the extent not set forth herein, the amount and types of coverage, the identification of any entity providing the coverage, the terms of any subordination and related information will be set forth in the Prospectus Supplement relating to a series of Securities. See 'Description of Credit Enhancement' and 'Subordination.' Advances............ As to be described in the related Prospectus Supplement, the Master Servicer may be obligated to make certain advances with respect to payments of delinquent scheduled interest and/or principal on the Mortgage Loans, but only to the extent that the Master Servicer believes that such amounts will be recoverable by it. Any such advance made by the Master Servicer with respect to a Mortgage Loan is recoverable by it as provided herein under 'Description of the Securities--Advances' either from recoveries on the specific Mortgage Loan or, with respect to any such advance subsequently determined to be nonrecoverable, out of funds otherwise distributable to the holders of the related series of Securities, which may include the holders of any Senior Securities of such series. As to be described in the related Prospectus Supplement, the Master Servicer may be required to advance Compensating Interest as defined hereafter under 'Description of the Securities-- Advances.' In addition, unless otherwise specified in the related Prospectus Supplement, the Master Servicer will be required to pay all 'out of pocket' costs and expenses incurred in the performance of its servicing obligations, but only to the extent that the Master Servicer reasonably believes that such amounts will increase Net Liquidation Proceeds on the related Mortgage Loan. See 'Description of the Securities--Advances.'
10 Optional Termination....... The Master Servicer, the Sponsor, or, if specified in the related Prospectus Supplement, the holders of the related class of Equity Securities or the Credit Enhancer may at their respective option effect early retirement of a series of Securities through the purchase of the Mortgage Loans and other assets in the related Trust Estate under the circumstances and in the manner set forth herein under 'The Pooling and Servicing Agreement--Termination; Retirement of Securities' and in the related Prospectus Supplement. Mandatory Termination....... The Trustee, the Master Servicer or certain other entities specified in the related Prospectus Supplement may be required to effect early retirement of a series of Securities by soliciting competitive bids for the purchase of the related Trust Estate or otherwise, under other circumstances and in the manner specified in 'The Pooling and Servicing Agreement--Termination; Retirement of Securi- ties' and in the related Prospectus Supplement. Legal Investment.... Not all of the Mortgage Loans in a particular Mortgage Pool may represent first liens. Accordingly, as disclosed in the related Pro- spectus Supplement, certain classes of Securities offered hereby and by the related Prospectus Supplement may not constitute 'mortgage related securities' for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') and, if so, will not be legal investments for certain types of institutional investors under SMMEA. Institutions whose investment activities are subject to legal investment laws and regulations or to review by certain regulatory authorities may be subject to additional restrictions on investment in certain classes of Securities. Any such institution should consult its own legal advisors in determining whether and to what extent a class of Securities constitutes legal investments for such investors. See 'Legal Investment' herein. ERISA Considerations.... A fiduciary of an employee benefit plan and certain other retirement plans and arrangements, including individual retirement accounts and annuities, Keogh plans, and collective investment funds and separate accounts in which such plans, accounts, annuities or arrangements are invested, that is subject to the Employee Retirement Income Security Act of 1974, as amended ('ERISA'), or Section 4975 of the Code (each such entity, a 'Plan') should carefully review with its legal advisors whether the purchase or holding of Securities could give rise to a transaction that is prohibited or is not otherwise permissible either under ERISA or Section 4975 of the Code. Investors are advised to consult their counsel and to review 'ERISA Considerations' herein. Certain Federal Income Tax Consequences...... Securities of each series offered hereby will, for federal income tax purposes, constitute either (i) interests ('Grantor Trust Securities') in a Trust treated as a grantor trust under applicable provisions of the Code, (ii) 'regular interests' ('REMIC Regular Securities') or 'residual interests' ('REMIC Residual Securi- ties') in a Trust treated as a REMIC (or, in certain instances, containing one or more REMIC's) under Sections 860A through 860G of the Code, (iii) debt issued by a Trust ('Debt Securities')
11 or (iv) interests in a Trust which is treated as a partnership ('Partnership Interests'). Investors are advised to consult their tax advisors and to review 'Certain Federal Income Tax Consequences' herein and in the related Prospectus Supplement. Registration of Securities........ Securities may be represented by global securities registered in the name of Cede & Co. ('Cede'), as nominee of The Depository Trust Company ('DTC'), or another nominee. In such case, Securityholders will not be entitled to receive definitive securities representing such Holders' interests, except in certain circumstances described in the related Prospectus Supplement. See 'Description of the Securities--Form of Securities' herein. Ratings............. Each class of Fixed-Income Securities offered pursuant to the related Prospectus Supplement will be rated in one of the four highest rating categories by one or more 'national statistical rating organizations,' as defined in the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and commonly referred to as 'Rating Agencies.' Such ratings will address, in the opinion of such Rating Agencies, the likelihood that the related Trust will be able to make timely payment of all amounts due on the related Fixed-Income Securities in accordance with the terms thereof. Such ratings will neither address any prepayment or yield considerations applicable to any Securities nor constitute a recommendation to buy, sell or hold any Securities. Equity Securities will not be rated. The ratings expected to be received with respect to any Securities will be set forth in the related Prospectus Supplement.
12 RISK FACTORS Investors should consider, among other things, the following factors in connection with the purchase of the Securities. Limited Liquidity. There can be no assurance that a secondary market for the Securities of any series or class will develop or, if it does develop, that it will provide Securityholders with liquidity of investment or that it will continue for the life of the Securities of any series. The Prospectus Supplement for any series of Securities may indicate that an underwriter specified therein intends to establish a secondary market in such Securities; however, no underwriter will be obligated to do so. Unless otherwise specified in the related Prospectus Supplement, the Securities will not be listed on any securities exchange. Limited Obligations. The Securities will not represent an interest in or obligation, either recourse or non-recourse (except for certain non-recourse debt described under 'Certain Federal Income Tax Consequences'), of the Sponsor, the Master Servicer, any Originator (as defined herein) or any person other than the related Trust. The only obligations of the foregoing entities with respect to the Securities or the Mortgage Loans will be the obligations (if any) of the Sponsor, the related Originators and the Master Servicer pursuant to certain limited representations and warranties made with respect to the Mortgage Loans, the Master Servicer's servicing obligations under the related Pooling and Servicing Agreement (including its limited obligation, if any, to make certain advances in the event of delinquencies on the Mortgage Loans, but only to the extent deemed recoverable) and, if and to the extent expressly described in the related Prospectus Supplement, certain limited obligations of the Sponsor, Master Servicer, applicable Sub-Servicer, or another party in connection with a purchase obligation ('Purchase Obligation') or an agreement to purchase or act as remarketing agent with respect to a Convertible Mortgage Loan upon conversion to a fixed rate. Notwithstanding the foregoing, and as to be described in the related Prospectus Supplement, certain types of Credit Enhancement, such as a financial guaranty insurance policy or a letter of credit, may constitute a full recourse obligation of the issuer of such Credit Enhancement. Except as described in the related Prospectus Supplement, neither the Securities nor the underlying Mortgage Loans will be guaranteed or insured by any governmental agency or instrumentality, or by the Sponsor, the Master Servicer, any Sub-Servicer or any of their affiliates. Proceeds of the assets included in the related Trust Estate for each series of Securities (including the Mortgage Loans and any form of Credit Enhancement) will be the sole source of payments on the Securities, and there will be no recourse to the Sponsor or any other entity in the event that such proceeds are insufficient or otherwise unavailable to make all payments provided for under the Securities. Limitations, Reduction and Substitution of Credit Enhancement. With respect to each series of Securities, Credit Enhancement will be provided in limited amounts to cover certain types of losses on the underlying Mortgage Loans. Credit Enhancement will be provided in one or more of the forms referred to herein, including, but not limited to: a letter of credit; a Purchase Obligation; a mortgage pool insurance policy; a special hazard insurance policy; a bankruptcy bond; a reserve fund; a financial guaranty insurance policy or other type of Credit Enhancement to provide partial coverage for certain defaults and losses relating to the Mortgage Loans. Credit Enhancement also may be provided in the form of the related class of Equity Securities, subordination of one or more classes of Fixed-Income Securities in a series under which losses in excess of those absorbed by any related class of Equity Securities are first allocated to any Subordinate Securities up to a specified limit, cross-support among Mortgage Assets and/or overcollateralization. See 'Subordination' and 'Description of Credit Enhancement' herein. Regardless of the form of Credit Enhancement provided, the coverage will be limited in amount and in most cases will be subject to periodic reduction in accordance with a schedule or formula. Furthermore, such Credit Enhancements may provide only very limited coverage as to certain types of losses, and may provide no coverage as to certain other types of losses. Generally, Credit Enhancements do not directly or indirectly guarantee to the investors any specified rate of prepayments. The Master Servicer will generally be permitted to reduce, terminate or substitute all or a portion of the Credit Enhancement for any series of Securities, if the applicable Rating Agency indicates that the then-current rating thereof will not be adversely affected. To the extent not set forth herein, the amount and types of coverage, the identification of any entity providing the coverage, the terms of any subordination and related information will be set forth in the Prospectus Supplement relating to a series of Securities. See 'Description of Credit Enhancement' and 'Subordination.' 13 RISKS OF THE MORTGAGE LOANS Risk of the Losses Associated with Junior Liens. Certain of the Mortgage Loans will be secured by junior liens subordinate to the rights of the mortgagee or beneficiary under each related senior mortgage or deed of trust. As a result, the proceeds from any liquidation, insurance or condemnation proceedings will be available to satisfy the principal balance of a mortgage loan only to the extent that the claims, if any, of each such senior mortgagee or beneficiary are satisfied in full, including any related foreclosure costs. In addition, a mortgagee secured by a junior lien may not foreclose on the related mortgaged property unless it forecloses subject to the related senior mortgage or mortgages, in which case it must either pay the entire amount of each senior mortgage to the applicable mortgagee at or prior to the foreclosure sale or undertake the obligation to make payments on each senior mortgage in the event of default thereunder. In servicing junior lien loans in its portfolio, it has been the practice of the Master Servicer to satisfy each such senior mortgage at or prior to the foreclosure sale only to the extent that it determines any amounts so paid will be recoverable from future payments and collections on such junior lien loans or otherwise. The Trusts will not have any source of funds to satisfy any such senior mortgage or make payments due to any senior mortgagee. See 'Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure.' Risk of Losses Associated with Declining Real Estate Values. An investment in securities such as the Securities that generally represent beneficial ownership interests in the Mortgage Loans or debt secured by such Mortgage Loans may be affected by, among other things, a decline in real estate values and changes in the borrowers' financial condition. No assurance can be given that values of the Mortgaged Properties have remained or will remain at their levels on the dates of origination of the related Mortgage Loans. If the residential real estate market should experience an overall decline in property values such that the outstanding balances of any senior liens, the Mortgage Loans and any secondary financing on the Mortgaged Properties in a particular Mortgage Pool become equal to or greater than the value of the Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the nonconforming credit mortgage lending industry. Such a decline could extinguish the interest of the related Trust in the Mortgaged Properties before having any effect on the interest of the related senior mortgagee. In addition, in the case of Mortgage Loans that are subject to negative amortization, due to the addition to principal balance of deferred interest ('Deferred Interest'), the principal balances of such Mortgage Loans could be increased to an amount equal to or in excess of the value of the underlying Mortgaged Properties, thereby increasing the likelihood of default. To the extent that such losses are not covered by the applicable Credit Enhancement, holders of Securities of the series evidencing interests in the related Mortgage Pool will bear all risk of loss resulting from default by Mortgagors and will have to look primarily to the value of the Mortgaged Properties for recovery of the outstanding principal and unpaid interest on the defaulted Mortgage Loans. Risk of Losses Associated with Certain Non-Conforming Credit and Non-Traditional Loans. The Sponsor's underwriting standards consider, among other things, a mortgagor's credit history, repayment ability and debt service-to-income ratio, as well as the value of the property; however, the Sponsor's Mortgage Loan program generally provides for the origination of Mortgage Loans relating to non-conforming credits. For purposes hereof, 'non-conforming credit' means a mortgage loan which, based upon standard underwriting guidelines, is ineligible for purchase by the Federal National Mortgage Association ('FNMA') or the Federal Home Loan Mortgage Corporation ('FHLMC') due to credit characteristics that do not meet FNMA or FHLMC guidelines, respectively. Certain of the types of loans that may be included in the Mortgage Pools may involve additional uncertainties not present in traditional types of loans. For example, certain of the Mortgage Loans may provide for escalating or variable payments by the borrower under the Mortgage Loan (the 'Mortgagor'), as to which the Mortgagor is generally qualified on the basis of the initial payment amount. In some instances the Mortgagors' income may not be sufficient to enable them to continue to make their loan payments as such payments increase and thus the likelihood of default will increase. For a more detailed discussion, see 'Mortgage Loan Program.' Risk of Losses Associated with Balloon Loans. Certain of the Mortgage Loans may constitute 'Balloon Loans.' Balloon Loans are originated with a stated maturity of less than the period of time of the corresponding amortization schedule. Consequently, upon the maturity of a Balloon Loan, the Mortgagor will be required to make a 'balloon' payment that will be significantly larger than such Mortgagor's previous monthly payments. The ability of such a Mortgagor to repay a Balloon Loan at maturity frequently will depend on such borrower's 14 ability to refinance the Mortgage Loan. The ability of a Mortgagor to refinance such a Mortgage Loan will be affected by a number of factors, including the level of available mortgage rates at the time, the value of the related Mortgaged Property, the Mortgagor's equity in the related Mortgaged Property, the financial condition of the Mortgagor, the tax laws and general economic conditions at the time. Although a low interest rate environment may facilitate the refinancing of a balloon payment, the receipt and reinvestment by Securityholders of the proceeds in such an environment may produce a lower return than that previously received in respect of the related Mortgage Loan. Conversely, a high interest rate environment may make it more difficult for the Mortgagor to accomplish a refinancing and may result in delinquencies or defaults. None of the Sponsor, the Originators, the Master Servicer, any Sub-Servicer or the Trustee will be obligated to provide funds to refinance any Mortgage Loan, including Balloon Loans. Risk of Losses Associated with ARM Loans. ARM Loans may be underwritten on the basis of an assessment that Mortgagors will have the ability to make payments in higher amounts after relatively short periods of time. In some instances, Mortgagors' income may not be sufficient to enable them to continue to make their loan payments as such payments increase and thus the likelihood of default will increase. Risk of Losses Associated with Bankruptcy of Mortgagors. General economic conditions have an impact on the ability of borrowers to repay Mortgage Loans. Loss of earnings, illness and other similar factors also may lead to an increase in delinquencies and bankruptcy filings by borrowers. In the event of personal bankruptcy of a Mortgagor, it is possible that a Trust could experience a loss with respect to such Mortgagor's Mortgage Loan. In conjunction with a Mortgagor's bankruptcy, a bankruptcy court may suspend or reduce the payments of principal and interest to be paid with respect to such Mortgage Loan or permanently reduce the principal balance of such Mortgage Loan thereby either delaying or permanently limiting the amount received by the Trust with respect to such Mortgage Loan. Moreover, in the event a bankruptcy court prevents the transfer of the related Mortgaged Property to a Trust, any remaining balance on such Mortgage Loan may not be recoverable. Risk of Losses Associated with Mortgaged Properties. Even assuming that the Mortgaged Properties provide adequate security for the Mortgage Loans, substantial delays could be encountered in connection with the liquidation of defaulted Mortgage Loans and corresponding delays in the receipt of related proceeds by the Securityholders could occur. An action to foreclose on a Mortgaged Property securing a Mortgage Loan is regulated by state statutes, rules and judicial decisions and is subject to many of the delays and expenses of other lawsuits if defenses or counterclaims are interposed, sometimes requiring several years to complete. Furthermore, in some states an action to obtain a deficiency judgment is not permitted following a nonjudicial sale of a Mortgaged Property. In the event of a default by a Mortgagor, these restrictions, among other things, may impede the ability of the Master Servicer to foreclose on or sell the Mortgaged Property or to obtain liquidation proceeds (net of expenses) ('Liquidation Proceeds') sufficient to repay all amounts due on the related Mortgage Loan. The Master Servicer will be entitled to deduct from Liquidation Proceeds all expenses reasonably incurred in attempting to recover amounts due on the related liquidated Mortgage Loan ('Liquidated Mortgage Loan') and not yet repaid, including payments to prior lienholders, accrued Servicing Fees, legal fees and costs of legal action, real estate taxes, and maintenance and preservation expenses. In the event that any Mortgaged Properties fail to provide adequate security for the related Mortgage Loans and insufficient funds are available from any applicable Credit Enhancement, Securityholders could experience a loss on their investment. Liquidation expenses with respect to defaulted mortgage loans do not vary directly with the outstanding principal balance of the loan at the time of default. Therefore, assuming that a servicer takes the same steps in realizing upon a defaulted mortgage loan having a small remaining principal balance as it would in the case of a defaulted mortgage loan having a larger principal balance, the amount realized after expenses of liquidation would be less as a percentage of the outstanding principal balance of the smaller principal balance mortgage loan than would be the case with a larger principal balance loan. Under environmental legislation and judicial decisions applicable in various states, a secured party that takes a deed in lieu of foreclosure, or acquires at a foreclosure sale a mortgaged property that, prior to foreclosure, has been involved in decisions or actions which may lead to contamination of a property, may be liable for the costs of cleaning up the purportedly contaminated site. Although such costs could be substantial, it is unclear whether they would be imposed on a holder of a mortgage note (such as a Trust) which, under the terms of the Pooling 15 and Servicing Agreement, is not required to take an active role in operating the Mortgaged Properties. See 'Certain Legal Aspects of Mortgage Loans and Related Matters--Environmental Legislation.' Certain of the Mortgaged Properties relating to Mortgage Loans may not be owner occupied. It is possible that the rate of delinquencies, foreclosures and losses on Mortgage Loans secured by nonowner occupied properties could be higher than for loans secured by the primary residence of the borrower. Litigation. Any material litigation relating to the Sponsor or the Master Servicer will be specified in the related Prospectus Supplement. Geographic Concentration of Mortgaged Properties. Certain geographic regions from time to time will experience weaker regional economic conditions and housing markets than will other regions, and, consequently, will experience higher rates of loss and delinquency on mortgage loans generally. The Mortgage Loans underlying certain series of Securities may be concentrated in such regions, and such concentrations may present risk considerations in addition to those generally present for similar mortgage loan asset-backed securities without such concentrations. Information with respect to geographic concentration of Mortgaged Properties will be specified in the related Prospectus Supplement or related Current Report on Form 8-K. Legal Considerations. Applicable state laws generally regulate interest rates and other charges, require certain disclosures, and require licensing of the Originators and the Master Servicer and Sub-Servicers. In addition, most states have other laws, public policy and general principles of equity relating to the protection of consumers, unfair and deceptive practices and practices that may apply to the origination, servicing and collection of the Mortgage Loans. Depending on the provisions of the applicable law and the specific facts and circumstances involved, violations of these laws, policies and principles may limit the ability of the Master Servicer to collect all or part of the principal of or interest on the Mortgage Loans, may entitle the borrower to a refund of amounts previously paid and, in addition, could subject the Master Servicer to damages and administrative sanctions. See 'Certain Legal Aspects of Mortgage Loans and Related Matters.' The Mortgage Loans may also be subject to federal laws, including: (i) the Federal Truth-in-Lending Act and Regulation Z promulgated thereunder and the Real Estate Settlement Procedures Act and Regulation X promulgated thereunder, which require certain disclosures to the borrowers regarding the terms of the Mortgage Loans; (ii) the Equal Credit Opportunity Act and Regulation B promulgated thereunder, which prohibit discrimination on the basis of age, race, color, sex, religion, marital status, national origin, receipt of public assistance or the exercise of any right under the Consumer Credit Protection Act, in the extension of credit; and (iii) the Fair Credit Reporting Act, which regulates the use and reporting of information related to the borrower's credit experience. Depending on the provisions of the applicable law and the specific facts and circumstances involved, violations of these laws, policies and general principles of equity may limit the ability of the Master Servicer to collect all or part of the principal of or interest on the Mortgage Loans, may entitle the borrower to rescind the loan or to a refund of amounts previously paid and, in addition, could subject the Master Servicer to damages and administrative sanctions. If the Master Servicer is unable to collect all or part of the principal or interest on the Mortgage Loans because of a violation of the aforementioned laws, public policies or general principles of equity then the Trust may be delayed or unable to repay all amounts owed to Investors. Furthermore, depending upon whether damages and sanctions are assessed against the Master Servicer or an Originator, such violations may materially impact the financial ability of the Sponsor to continue to act as Master Servicer or the ability of an Originator to repurchase or replace Mortgage Loans if such violation breaches a representation or warranty contained in a Pooling and Servicing Agreement. Yield and Prepayment Considerations. The yield to maturity of the Securities of each series will depend on the rate of payment of principal (including prepayments, liquidations due to defaults, and repurchases due to conversion of adjustable-rate mortgage loans ('ARM Loans') to fixed-rate loans or breaches of representations and warranties) on the Mortgage Loans and the price paid by Securityholders. Such yield may be adversely affected by a higher or lower than anticipated rate of prepayments on the related Mortgage Loans. The yield to maturity on Strip Securities or Securities purchased at premiums or discounted to par will be extremely sensitive to the rate of prepayments on the related Mortgage Loans. In addition, the yield to maturity on certain other types of classes of Securities, including Accrual Securities or certain other classes in a series including more than one class of Securities, may be relatively more sensitive to the rate of prepayment on the related Mortgage Loans than other classes of Securities. 16 Unless otherwise specified in the related Prospectus Supplement, the Mortgage Loans may be prepaid in full or in part at any time; however, a prepayment penalty or premium may be imposed in connection therewith. Unless so specified in the related Prospectus Supplement, such penalties will not be property of the related Trust. The rate of prepayments of the Mortgage Loans cannot be predicted and is influenced by a wide variety of economic, social, and other factors, including prevailing mortgage market in terest rates, the availability of alternative financing, local and regional economic conditions and homeowner mobility. Therefore, no assurance can be given as to the level of prepayments that a Trust will experience. Prepayments may result from mandatory prepayments relating to unused moneys held in Pre-Funding Accounts, if any, voluntary early payments by borrowers (including payments in connection with refinancings of the related senior Mortgage Loan or Loans), sales of Mortgaged Properties subject to 'due-on-sale' provisions and liquidations due to default, as well as the receipt of proceeds from physical damage, credit life and disability insurance policies. In addition, repurchases or purchases from a Trust of Mortgage Loans or substitution adjustments required to be made under the Pooling and Servicing Agreement will have the same effect on the Securityholders as a prepayment of such Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement, all of the Mortgage Loans contain 'due-on-sale' provisions, and the Master Servicer will be required to enforce such provisions unless (i) the 'due-on-sale' clause, in the reasonable belief of the Master Servicer, is not enforceable under applicable law or (ii) the Master Servicer reasonably believes that to permit an assumption of the Mortgage Loan would not materially and adversely affect the interests of the Securityholders or of the related Credit Enhancer, if any. See 'The Pooling and Servicing Agreement' in the related Prospectus Supplement. Collections on the Mortgage Loans may vary due to the level of incidence of delinquent payments and of prepayments. Collections on the Mortgage Loans may also vary due to seasonal purchasing and payment habits of borrowers. Book-Entry Registration. Issuance of the Securities in book-entry form may reduce the liquidity of such Securities in the secondary trading market since investors may be unwilling to purchase Securities for which they cannot obtain definitive physical securities representing such Securityholders' interests, except in certain circumstances described in the related Prospectus Supplement. Since transactions in Securities will, in most cases, be able to be effected only through DTC, direct or indirect participants in DTC's book-entry system ('Direct or Indirect Participants') and certain banks, the ability of a Securityholder to pledge a Security to persons or entities that do not participate in the DTC system, or otherwise to take actions in respect of such Securities, may be limited due to lack of a physical security representing the Securities. Securityholders may experience some delay in their receipt of distributions of interest on and principal of the Securities since distributions may be required to be forwarded by the Trustee to DTC and, in such a case, DTC will be required to credit such distributions to the accounts of its Participants which thereafter will be required to credit them to the accounts of the applicable class of Securityholders either directly or indirectly through Indirect Participants. See 'Description of the Securities--Form of Securities.' The Status of the Mortgage Loans in the Event of Bankruptcy of the Sponsor or an Originator. In the event of the bankruptcy of the Sponsor or an Originator at a time when it or any affiliate thereof holds an Equity Security, a trustee in bankruptcy of the Sponsor, an Originator, or its creditors could attempt to recharacterize the sale of the Mortgage Loans to the related Trust as a borrowing by the Sponsor, the Originator or such affiliate with the result, if such recharacterization is upheld, that the Securityholders would be deemed creditors of the Sponsor, the Originator or such affiliate, secured by a pledge of the Mortgage Loans. If such an attempt were successful, it could prevent timely payments of amounts due to the Trust. Limitations on Interest Payments and Foreclosures. Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the 'Relief Act'), or similar state legislation, a Mortgagor who enters military service after the origination of the related Mortgage Loan (including a Mortgagor who is a member of the National Guard or is in reserve status at the time of the origination of the Mortgage Loan and is later called to active duty) may not be charged interest (including fees and charges) above an annual rate of 6% during the period of such Mortgagor's active duty status, unless a court orders otherwise upon application of the 17 lender. It is possible that such action could have an effect, for an indeterminate period of time, on the ability of the Master Servicer to collect full amounts of interest on certain of the Mortgage Loans. In addition, the Relief Act imposes limitations that would impair the ability of the Master Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's period of active duty status. Thus, in the event that such a Mortgage Loan goes into default, there may be delays and losses occasioned by the inability to realize upon the Mortgaged Property in a timely fashion. Security Rating. The rating of Securities credit enhanced through external Credit Enhancement such as a letter of credit, financial guaranty insurance policy or mortgage pool insurance will depend primarily on the creditworthiness of the issuer of such external Credit Enhancement device (a 'Credit Enhancer'). Any reduction in the rating assigned to the claims-paying ability of the related Credit Enhancer below the rating initially given to the Securities would likely result in a reduction in the rating of the Securities. See 'Ratings' in the Prospectus Supplement. THE TRUSTS A Trust for any series of Securities will include the primary mortgage assets ('Mortgage Assets') consisting of (A) a Mortgage Pool comprised of (i) Single Family Loans, (ii) Multi-family Loans, (iii) Cooperative Loans, (iv) Contracts, (v) Home Improvement Loans, or (vi) other loans or (B) certificates of interest or participation in the items described in clause (A) or in pools of such items, in each case, as specified in the related Prospectus Supplement, together with payments in respect of such primary Mortgage Assets and certain other accounts, obligations or agreements, in each case as specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, the Securities will be entitled to payment only from the assets of the related Trust (i.e., the related Trust Estate) and will not be entitled to payments in respect of the assets of any other related Trust Estate established by the Sponsor, the Originators or any of their affiliates. If specified in the related Prospectus Supplement, certain Securities will evidence the entire fractional undivided ownership interest in the related Mortgage Loans held by the related Trust or may represent debt secured by the related Mortgage Loans. The following is a brief description of the Mortgage Assets expected to be included in the related Trusts. If specific information respecting the primary Mortgage Assets is not known at the time the related series of Securities initially is offered, information of the nature described below will be provided in the Prospectus Supplement, and specific information will be set forth in a report on Form 8-K to be filed with the Commission within fifteen days after the initial issuance of such Securities (the 'Detailed Description'). A copy of the Pooling and Servicing Agreement with respect to each Series of Securities will be attached to the Form 8-K and will be available for inspection at the corporate trust office of the Trustee specified in the related Prospectus Supplement. A schedule of the Mortgage Assets relating to such Series (the 'Mortgage Asset Schedule') will be attached to the Pooling and Servicing Agreement delivered to the Trustee upon delivery of the Securities. The Mortgage Loans--General. The real properties and Manufactured Homes, as the case may be, that secure repayment of the Mortgage Loans and Contracts (the 'Mortgaged Properties') may be located in any one of the fifty states, the District of Columbia, Puerto Rico or any other Territories of the United States. Unless otherwise specified in the related Prospectus Supplement, the Mortgage Loans or Contracts will be 'Conventional Loans' (i.e., loans that are not insured or guaranteed by any governmental agency). If specified in the related Prospectus Supplement, Mortgage Loans with certain loan-to-value ratios and/or certain principal balances may be covered wholly or partially by primary mortgage insurance policies. Unless otherwise specified in the related Prospectus Supplement, all of the Mortgage Loans will be covered by standard hazard insurance policies (which may be in the form of a blanket or forced placed hazard insurance policy). The existence, extent and duration of any such coverage will be described in the applicable Prospectus Supplement. Unless otherwise described in the related Prospectus Supplement, the Mortgage Loans will not be guaranteed or insured by any government agency or other insurer. Unless otherwise specified in the related Prospectus Supplement, all of the Mortgage Loans in a Mortgage Pool will provide for payments to be made monthly ('monthly pay') or bi-weekly. The payment terms of the Mortgage Loans to be included in a Trust will be described in the related Prospectus Supplement and may 18 include any of the following features or combination thereof or other features described in the related Prospectus Supplement: (a) Interest may be payable at a Fixed Rate, or an Adjustable Rate (i.e., a rate that is adjustable from time to time in relation to an index, a rate that is fixed for a period of time and under certain circumstances is followed by an adjustable rate, a rate that otherwise varies from time to time, or a rate that is convertible from an adjustable rate to a fixed rate). The specified rate of interest on a Mortgage Loan is its 'Mortgage Rate.' Changes to an Adjustable Rate may be subject to periodic limitations, maximum rates, minimum rates or a combination of such limitations. Accrued interest may be deferred and added to the principal of a Mortgage Loan for such periods and under such circumstances as may be specified in the related Prospectus Supplement. If provided for in the Prospectus Supplement, certain Mortgage Loans may be subject to temporary buydown plans ('Buydown Mortgage Loans') pursuant to which the monthly payments made by the Mortgagor during the early years of the Mortgage Loan (the 'Buydown Period') will be less than the scheduled monthly payments on the Mortgage Loan, and the amount of any difference may be contributed from (i) an amount (such amount, exclusive of investment earnings thereon, being hereinafter referred to as 'Buydown Funds') funded by the originator of the Mortgage Loan or another source (including the Master Servicer or the related Originator and the builder of the Mortgaged Property) and placed in a custodial account (the 'Buydown Account') and (ii) if the Buydown Funds are contributed on a present value basis, investment earnings on such Buydown Funds. (b) Principal may be payable on a level debt service basis to fully amortize the Mortgage Loan over its term, may be calculated on the basis of an assumed amortization schedule that is significantly longer than the original term to maturity or on an interest rate that is different from the Mortgage Rate, or may not be amortized during all or a portion of the original term. Payment of all or a substantial portion of the principal may be due on maturity ('balloon payments'). Principal may include interest that has been deferred and added to the principal balance of the Mortgage Loan. (c) Monthly payments of principal and interest may be fixed for the life of the Mortgage Loan, may increase over a specified period of time ('graduated payments') or may change from period to period. Mortgage Loans may include limits on periodic increases or decreases in the amount of monthly payments and may include maximum or minimum amounts of monthly payments. Mortgage Loans having graduated payment provisions may provide for deferred payment of a portion of the interest due monthly during a specified period, and recoup the deferred interest through negative amortization during such period whereby the difference between the interest paid during such period and interest accrued during such period is added monthly to the outstanding principal balance. Other Mortgage Loans sometimes referred to as 'growing equity' mortgage loans may provide for periodic scheduled payment increases for a specified period with the full amount of such increases being applied to principal. (d) Prepayments of principal may be subject to a prepayment fee, which may be fixed for the life of the Mortgage Loan or may decline over time, and may be prohibited for the life of the Mortgage Loan or for certain periods ('lockout periods'). Certain Mortgage Loans may permit prepayments after expiration of the applicable lockout period and may require the payment of a prepayment fee in connection therewith. Other Mortgage Loans may permit prepayments without payment of a fee unless the prepayment occurs during specified time periods. The Mortgage Loans may include due-on-sale clauses which permit the mortgagee to demand payment of the entire Mortgage Loan in connection with the sale or certain transfers of the related Mortgaged Property. Other Mortgage Loans may be assumable by persons meeting the then applicable underwriting standards of the related Originator. (e) As more fully described in the related Prospectus Supplement, the Mortgage Loans may consist, in whole or in part, of revolving home equity loans or certain balances thereof ('Revolving Credit Line Loans'). Interest on each Revolving Credit Line Loan, excluding introductory rates offered from time to time during promotional periods, may be computed and payable monthly on the average daily outstanding principal balance of such loan. From time to time prior to the expiration of the related draw period specified in a Revolving Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be drawn down (up to a maximum amount as set forth in the related Prospectus Supplement) or repaid. If specified in the related Prospectus Supplement, new draws by borrowers under the Revolving Credit Line Loans will 19 automatically become part of the Trust Estate described in such Prospectus Supplement. As a result, the aggregate balance of the Revolving Credit Line Loans will fluctuate from day to day as new draws by borrowers are added to the Trust Estate and principal payments are applied to such balances and such amounts will usually differ each day, as more specifically described in the related Prospectus Supplement. Under certain circumstances, under a Revolving Credit Line Loan, a borrower may, during the related draw period, choose an interest only payment option, during which the borrower is obligated to pay only the amount of interest which accrues on the loan during the billing cycle, and may also elect to pay all or a portion of the principal. An interest only payment option may terminate at the end of the related draw period, after which the borrower must begin paying at least a minimum monthly portion of the average outstanding principal balance of the loan. Except as otherwise described in the related Prospectus Supplement or in the related Current Report on Form 8-K, interest will be calculated on each Mortgage Loan pursuant to one of three methods: Date of Payment Loans. Date of Payment Loans provide that interest is charged to the Mortgagor at the applicable Mortgage Rate on the outstanding principal balance of such Note and calculated based on the number of days elapsed between receipt of the Mortgagor's last payment through receipt of the Mortgagor's most current payment. Such interest is deducted from the Mortgagor's payment amount and the remainder, if any, of the payment is applied as a reduction to the outstanding principal balance of such Note. Although the Mortgagor is required to remit equal monthly payments on a specified monthly payment date that would reduce the outstanding principal balance of such Note to zero at such Note's maturity date, payments that are made by the Mortgagor after the due date therefor would cause the outstanding principal balance of such Note not to be reduced to zero. In such a case, the Mortgagor would be required to make an additional principal payment at the maturity date for such Note. On the other hand, if a Mortgagor makes a payment (other than a prepayment) before the due date therefor, the reduction in the outstanding principal balance of such Note would occur over a shorter period of time than it would have occurred had it been based on the original amortization schedule of such Note. Actuarial Loans. Actuarial Loans provide that interest is charged to the Mortgagor thereunder, and payments are due from such Mortgagor, as of a scheduled day of each month which is fixed at the time of origination. Scheduled monthly payments made by the Mortgagors on the Actuarial Loans either earlier or later than the scheduled due dates thereof will not affect the amortization schedule or the relative application of such payments to principal and interest. Rule of 78's Loans. A Rule of 78's Loan provides for the payment by the related Mortgagor of a specified total amount of payments, payable in equal monthly installments on each due date, which total represents the principal amount financed and add-on interest in an amount calculated on the basis of the stated Mortgage Rate for the term of the Loan. The rate at which such amount of add-on interest is earned and, correspondingly, the amount of each fixed monthly payment allocated to reduction of the outstanding principal are calculated in accordance with the 'Rule of 78's.' Under a Rule of 78's Loan, the amount of a payment allocable to interest is determined by multiplying the total amount of add-on interest payable over the term of the loan by a fraction derived as described below. The fraction used in the calculation of add-on interest earned each month under a Rule of 78's Loan has as its denominator a number equal to the sum of a series of numbers. The series of numbers begins with one and ends with the number of monthly payments due under the loan. For example, with a loan providing for 12 payments, the denominator of each month's fraction will be 78, the sum of the series of numbers from 1 to 12. The numerator of the fraction for a given month is the number of original payments to stated maturity less the number of payments made up to but not including the current month. Accordingly, in the example of a twelve-month loan, the fraction for the first payment is, for the second payment, for the third party, and so on through the final payment, for which the fraction is. The applicable fraction is then multiplied by the total add-on interest payable over the entire term of the loan, and the resulting amount is the amount of add-on interest 'earned' that month. The difference between the amount of the monthly payment by the obligor and the amount of earned add-on interest calculated for the month is applied to principal reduction. Rule of 78's Loans are non-level yield instruments. The yield in the initial months of a Rule of 78's Loans is somewhat higher than the stated Mortgage 20 Rate (computed on an actuarial basis) and the yield in the later months of the loan is somewhat less than such stated Mortgage Rate. The Prospectus Supplement for each series of Securities or the Current Report on Form 8-K will contain certain information with respect to the Mortgage Loans (or a sample thereof) contained in the related Mortgage Pool; such information, insofar as it may relate to statistical information relating to such Mortgage Loans will be presented as of a date certain (the 'Statistic Calculation Date') which may also be the related cut-off date (the 'Cut-Off Date'). Such information will include to the extent applicable to the particular Mortgage Pool (in all cases as of the Statistic Calculation Date) (i) the aggregate outstanding principal balance and the average outstanding principal balance of the Mortgage Loans, (ii) the largest principal balance and the smallest principal balance of any of the Mortgage Loans, (iii) the types of Mortgaged Property securing the Mortgage Loans (e.g., one- to four-family houses, vacation and second homes, Manufactured Homes, multifamily apartments or other real property), (iv) the original terms to stated maturity of the Mortgage Loans, (v) the weighted average remaining term to maturity of the Mortgage Loans and the range of the remaining terms to maturity; (vi) the earliest origination date and latest maturity date of any of the Mortgage Loans, (vii) the weighted average CLTV and the range of CLTV's of the Mortgage Loans at origination, (viii) the weighted average Mortgage Rate or annual percentage rate (as determined under Regulation Z) (the 'APR') and ranges of Mortgage Rates or APRs borne by the Mortgage Loans, (ix) in the case of Mortgage Loans having adjustable rates, the weighted average of the adjustable rates and indices, if any; (x) the aggregate outstanding principal balance, if any, of Buy-Down Loans and Mortgage Loans having graduated payment provisions; (xi) the amount of any mortgage pool insurance policy, special hazard insurance policy or bankruptcy bond to be maintained with respect to such Mortgage Pool; (xii) a description of any standard hazard insurance required to be maintained with respect to each Mortgage Loan; (xiii) a description of any Credit Enhancement to be provided with respect to all or any Mortgage Loans or the Mortgage Pool; and (xiv) the geographical distribution of the Mortgage Loans on a state-by-state basis. In addition, preliminary or more general information of the nature described above may be provided in the Prospectus Supplement, and specific or final information may be set forth in a Current Report on Form 8-K, together with the related Pooling and Servicing Agreement, which will be filed with the Securities and Exchange Commission and will be made available to holders of the related series of Securities within fifteen days after the initial issuance of such Securities. The loan-to-value ratio (the 'LTV') of a Mortgage Loan is equal to the ratio (expressed as a percentage) of the original principal balance of such Mortgage Loan to appraised value of the related Mortgaged Property (unless otherwise disclosed in the related Prospectus Supplement or in the related Current Report on Form 8-K, less the amount, if any, of the premium for any credit life insurance) at the time of origination of the Mortgage Loan or, in the case where the Mortgage represents a purchase money instrument, the lesser of (a) the appraised value or (b) the purchase price. The combined loan-to-value ratio (the 'CLTV') of a Mortgage Loan at any given time is the ratio, expressed as a percentage, determined by dividing (x) the sum of the original principal balance of such Mortgage Loan (unless otherwise disclosed in the related Prospectus Supplement or in the related Current Report on Form 8-K, less the amount, if any, of the premium for any credit life insurance) plus the then- current principal balance of all mortgage loans (each, a 'Senior Lien') secured by liens on the related Mortgaged Property having priorities senior to that of the lien which secures such Mortgage Loan, by (y) the value of the related Mortgaged Property, based upon the appraisal or valuation (which may in certain instances include estimated increases in value as a result of certain home improvements to be financed with the proceeds of such Mortgage Loan) made at the time of origination of the Mortgage Loan. If the related Mortgagor will use the proceeds of the Mortgage Loan to refinance an existing Mortgage Loan which is being serviced directly or indirectly by the Master Servicer, the requirement of an appraisal or other valuation at the time the new Mortgage Loan is made may be waived. Unless otherwise specified in the related Prospectus Supplement, for purposes of calculating the CLTV of a Contract relating to a new Manufactured Home, the value of such Manufactured Home will be no greater than the sum of a fixed percentage of the list price of the unit actually billed by the manufacturer to the dealer (exclusive of freight to the dealer site) including 'accessories' identified in the invoice (the 'Manufacturer's Invoice Price'), plus the actual cost of any accessories purchased from the dealer, a delivery and set-up allowance, depending on the size of the unit, and the cost of state and local taxes, filing fees and up to three years prepaid hazard insurance premiums. Unless otherwise specified herein or in the related Prospectus Supplement, the value of a used Manufactured Home will be either (x) the appraised value, and National Automobile Dealer's Association book value plus prepaid taxes and hazard insurance premiums or 21 (y) the sum of (i) the appraised value of the land to which the Manufactured Home is attached and (ii) the appraised value of the Manufactured Home. The appraised value of a Manufactured Home will be based upon the age and condition of the manufactured housing unit and the quality and condition of the mobile home park in which it is situated, if applicable. No assurance can be given that values of the Mortgaged Properties have remained or will remain at their levels on the dates of origination of the related Mortgage Loans. If the residential real estate market should experience an overall decline in property values such that the outstanding principal balances of the Mortgage Loans (plus any additional financing by other lenders on the same Mortgaged Properties) in a particular Pool become equal to or greater than the value of such Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the non-conforming credit mortgage lending industry. An overall decline in the market value of residential real estate, the general condition of a Mortgaged Property, or other factors, could adversely affect the values of the Mortgaged Properties such that the outstanding balances of the Mortgage Loans, together with any additional liens on the Mortgaged Properties, equal or exceed the value of the Mortgaged Properties. Under such circumstances, the actual rates of delinquencies, foreclosures and losses could be higher than those now generally experienced in the non-conforming credit mortgage lending industry. Certain Mortgage Loans may be secured by junior liens ('Junior Lien Loans') subordinate to the rights of the mortgagee under any related senior mortgage(s). The proceeds from any liquidation, insurance or condemnation of Mortgaged Properties relating to Junior Lien Loans in a Mortgage Pool will be available to satisfy the principal balance of such Junior Lien Loans only to the extent that the claims, if any, of all related senior mortgagees, including any related foreclosure costs, are satisfied in full. In addition, the Master Servicer may not foreclose on a Mortgaged Property relating to a Junior Lien Loan unless it forecloses subject to the related senior mortgage or mortgages, in which case it must either pay the entire amount of each senior mortgage to the applicable mortgagee at or prior to the foreclosure sale or undertake the obligation to make payments on each senior mortgage in the event of default thereunder. Generally, in servicing Junior Lien Loans in its loan portfolios, it has been the Master Servicer's practice to satisfy each senior mortgage at or prior to a foreclosure sale only to the extent that it determines any amounts so paid will be recoverable from future payments and collections on the Mortgage Loans or otherwise. The Trusts will not have any source of funds to satisfy any such senior mortgage or make payments due to any senior mortgagee. See 'Certain Legal Aspects of Mortgage Loans and Related Matters--Foreclosure.' Other factors affecting mortgagors' ability to repay Mortgage Loans include excessive building resulting in an oversupply of housing stock or a decrease in employment reducing the demand for units in an area; federal, state or local regulations and controls affecting rents; prices of goods and energy; environmental restrictions; increasing labor and material costs; and the relative attractiveness of the Mortgaged Properties. To the extent that losses on the Mortgage Loans are not covered by Credit Enhancements, such losses will be borne, at least in part, by the Securityholders of the related series. The Sponsor will cause the Mortgage Loans comprising each Mortgage Pool to be assigned to the Trustee named in the related Prospectus Supplement for the benefit of the holders of the Securities of the related series. The Master Servicer will service the Mortgage Loans, either directly or through Sub-Servicers, pursuant to the Pooling and Servicing Agreement and will receive a fee for such services. See 'Mortgage Loan Program' and 'The Pooling and Servicing Agreement.' With respect to Mortgage Loans serviced through a Sub-Servicer, the Master Servicer will remain liable for its servicing obligations under the related Pooling and Servicing Agreement as if the Master Servicer alone were servicing such Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement, the only obligations of the Sponsor and the Originators with respect to a series of Securities will be to provide (or, where the Sponsor or an Originator acquired a Mortgage Loan from another originator, obtain from such originator) certain representations and warranties concerning the Mortgage Loans and to assign to the Trustee for such series of Securities the Sponsor's or Originator's rights with respect to such representations and warranties. See 'The Pooling and Servicing Agreement.' The obligations of the Master Servicer with respect to the Mortgage Loans will consist principally of its contractual servicing obligations under the related Pooling and Servicing Agreement (including its obligation to enforce the obligations of the Sub-Servicers or Originators as more fully described herein under 'Mortgage Loan Program--Qualifications of Originators' and 'The Pooling and Servicing Agreement') and 22 its obligation, as described in the related Prospectus Supplement, to make certain cash advances in the event of delinquencies in payments on, or prepayments received with respect to, the Mortgage Loans in the amounts described herein under 'Description of the Securities--Advances.' The obligations of a Master Servicer to make advances may be subject to limitations, to the extent provided herein and in the related Prospectus Supplement. Single Family and Cooperative Loans. Unless otherwise specified in the Prospectus Supplement, single family loans will consist of mortgage loans, deeds of trust or participation or other beneficial interests therein, secured by first or junior liens on one- to four-family residential properties ('Single Family Loans'). The Mortgaged Properties relating to Single Family Loans will consist of detached or semi-detached one-family dwelling units, two- to four-family dwelling units, townhouses, rowhouses, individual condominium units in condominium developments, individual units in planned unit developments, and certain mixed use and other dwelling units. Such Mortgaged Properties may include owner-occupied (which includes vacation and second homes) and non-owner occupied investment properties. If so specified, the Single Family Loans may include loans or participations therein secured by mortgages or deeds of trust on condominium units in low- or high-rise condominium developments together with such condominium units' appurtenant interests in the common elements of such condominium developments. Unless otherwise specified, the Cooperative Loans will be secured by security interests in or similar liens on stock, shares or membership certificates issued by cooperatives and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific dwelling units in such cooperatives' buildings. Multi-family Loans. Multi-family loans will consist of mortgage loans, deeds of trust or participation or other beneficial interests therein, secured by first or junior liens on rental apartment buildings or projects containing five or more residential units ('Multi-family Loans'). Mortgaged Properties that secure Multi-family Loans may include high-rise, mid-rise and garden apartments. Certain of the Multi-family Loans may be secured by apartment buildings owned by Cooperatives. In such cases, the Cooperative owns all the apartment units in the building and all common areas. The Cooperative is owned by tenant-stockholders who, through ownership of stock, shares or membership certificates in the corporation, receive proprietary leases or occupancy agreements that confer exclusive rights to occupy specific apartments or units. Generally, a tenant-stockholder of a Cooperative must make a monthly payment to the Cooperative representing such tenant-stockholder's pro rata share of the Cooperative's payments for its mortgage loan, real property taxes, maintenance expenses and other capital or ordinary expenses. Those payments are in addition to any payments of principal and interest the tenant-stockholder must make on any loans to the tenant-stockholder secured by its shares in the Cooperative. The Cooperative will be directly responsible for building management and, in most cases, payment of real estate taxes and hazard and liability insurance. A Cooperative's ability to meet debt service obligations on a Multi-family Loan, as well as all other operating expenses, will be dependent in large part on the receipt of maintenance payments from the tenant-stockholders, as well as any rental income from units or commercial areas the Cooperative might control. Unanticipated expenditures may in some cases have to be paid by special assessments on the tenant-stockholders. Home Improvement Loans. Unless otherwise specified in the Prospectus Supplement, loans to make home improvements may be secured by first or junior liens on conventional one- to four-family residential properties and multi-family residential properties ('Home Improvement Loans'). Home Improvement Loans may be conventional, or may be partially insured by the Federal Housing Administration ('FHA') or another federal or state agency, as specified in the related Prospectus Supplement. The loan proceeds from such Home Improvement Loans are typically disbursed to an escrow agent which, according to guidelines established by the Originators, releases such proceeds to the contractor upon completion of the improvements or in draws as the work on the improvements progresses. Costs incurred by the Mortgagor for loan origination including origination points and appraisal, legal and title fees, are often included in the amount financed. In addition, Home Improvement Loans generally provide additional security to a first or junior mortgage loan because home improvements typically retain or increase the value of a property. Contracts. Contracts will consist of manufactured housing conditional sales contracts and installment sales or loan agreements each secured by a Manufactured Home ('Contracts'). Contracts may be conventional, insured partially by the FHA or partially guaranteed by the Veterans Administration, as specified in the related 23 Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, each Contract will be fully amortizing and will bear interest at its APR. Unless otherwise specified in the related Prospectus Supplement, the 'Manufactured Homes' securing the Contracts will consist of manufactured homes within the meaning of 42 United States Code, Section 5402(6), which defines a 'manufactured home' as 'a structure, transportable in one or more sections, which in the traveling mode, is eight body feet or more in width or forty body feet or more in length, or, when erected on site, is three hundred twenty or more square feet, and which is built on a permanent chassis and designed to be used as a dwelling with or without a permanent foundation when connected to the required utilities, and includes the plumbing, heating, air conditioning, and electrical systems contained therein; except that such term shall include any structure which meets all the requirements of [this] paragraph except the size requirements and with respect to which the manufacturer voluntarily files a certification required by the Secretary of Housing and Urban Development and complies with the standards established under [this] chapter.' The related Prospectus Supplement will specify for the Contracts contained in the related Trust, among other things, the date of origination of the Contracts; the Mortgage Rates or the APRs on the Contracts; the Contract Loan-to-Value Ratios; the minimum and maximum outstanding principal balances as of the Statistic Calculation Date and the average outstanding principal balance; the outstanding principal balances of the Contracts included in the related Trust; and the original maturities of the Contracts and the last maturity date of any Contract. 24 THE MORTGAGE POOLS GENERAL Unless otherwise specified in the related Prospectus Supplement, each Mortgage Pool will consist primarily of (i) conventional Mortgage Loans, minus any stripped portion of the interest payments due under the related Mortgage Note that may have been retained by any Originator or broker ('Originator's Retained Yield'), or any other interest retained by the Sponsor or any affiliate of the Sponsor, evidenced by promissory notes (the 'Mortgage Notes') secured by mortgages or deeds of trust or other similar security instruments creating a lien on single-family (i.e., one- to four-family) residential, multi-family properties or mixed use properties, or (ii) certificates of interest or participations in such Mortgage Notes. The Mortgaged Properties will consist primarily of attached or detached one-family dwelling units, two- to four-family dwelling units, condominiums, townhouses, row houses, individual units in planned-unit developments and certain other dwelling units, mixed use properties and the fee, leasehold or other interests in the underlying real property. The Mortgaged Properties may be owner-occupied (which includes second and vacation homes) and non-owner occupied investment properties. If specified in the related Prospectus Supplement relating to a series of Securities, a Mortgage Pool may contain cooperative apartment loans ('Cooperative Loans') evidenced by promissory notes ('Cooperative Notes') secured by security interests in shares issued by cooperatives and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific dwelling units in the related buildings. As used herein, unless the context indicates otherwise, 'Mortgage Loans' include Cooperative Loans, 'Mortgaged Properties' include shares in the related cooperative and the related proprietary leases or occupancy agreements securing Cooperative Notes, 'Mortgage Notes' include Cooperative Notes and 'Mortgages' include security agreements with respect to Cooperative Notes. Each Mortgage Loan will be selected by the Sponsor for inclusion in a Mortgage Pool from among mortgage loans originated by one or more institutions affiliated with the Sponsor (such affiliated institutions, the 'Affiliated Originators'), or from banks, savings and loan associations, mortgage bankers, mortgage brokers, investment banking firms, the RTC, the FDIC and other mortgage loan originators or purchasers not affiliated with the Sponsor (such unaffiliated institutions, the 'Unaffiliated Originators' and, collectively with the Affiliated Originators, the 'Originators'), all as described below under 'Mortgage Loan Program.' The characteristics of the Mortgage Loans will be described in the related Prospectus Supplement. Other mortgage loans available for acquisition by a Trust may have characteristics that would make them eligible for inclusion in a Mortgage Pool but may not be selected by the Sponsor for inclusion in such Mortgage Pool. Each Security will evidence an interest in only the related Mortgage Pool and corresponding Trust Estate, and not in any other Mortgage Pool or any other Trust Estate (except in those limited situations whereby certain collections on any Mortgage Loans in a related Mortgage Pool in excess of amounts needed to pay the related securities may be deposited in a common, master reserve account that provides Credit Enhancement for more than one series of Securities). THE MORTGAGE POOLS Unless otherwise specified below or in the related Prospectus Supplement, all of the Mortgage Loans in a Mortgage Pool will (i) have payments that are due monthly or bi-weekly, (ii) be secured by Mortgaged Properties located in any of the fifty states, the District of Columbia, Puerto Rico or any other Territories of the United States and (iii) consist of one or more of the following types of mortgage loans: (1) Fixed-rate, fully-amortizing mortgage loans (which may include mortgage loans converted from adjustable-rate mortgage loans or otherwise modified) providing for level monthly payments of principal and interest and terms at origination or modification of generally not more than 30 years; (2) ARM Loans having original or modified terms to maturity of generally not more than 30 years with a related Mortgage Rate that adjusts periodically, at the intervals described in the related Prospectus Supplement (which may have adjustments in the amount of monthly payments at periodic intervals) over the term of the mortgage loan to equal the sum of a fixed percentage set forth in the related Mortgage Note (the 25 'Note Margin') and an index (the 'Index') to be specified in the related Prospectus Supplement, such as, by way of example: (i) U.S. Treasury securities of a specified constant maturity, (ii) weekly auction average investment yield of U.S. Treasury bills of specified maturities, (iii) the daily Bank Prime Loan rate made available by the Federal Reserve Board or as quoted by one or more specified lending institutions, (iv) the cost of funds of member institutions for the Federal Home Loan Bank of San Francisco, or (v) the interbank offered rates for U.S. dollar deposits in the London Markets, each calculated as of a date prior to each scheduled interest rate adjustment date that will be specified in the related Prospectus Supplement. The related Prospectus Supplement will set forth the relevant Index, and the related Prospectus Supplement or the related Current Report on Form 8-K will indicate the highest, lowest and weighted-average Note Margin with respect to the ARM Loans in the related Mortgage Pool. If specified in the related Prospectus Supplement, an ARM Loan may include a provision that allows the Mortgagor to convert the adjustable Mortgage Rate to a fixed rate at some point during the term of such ARM Loan subsequent to the initial payment date; (3) Fixed-rate, graduated payment mortgage loans having original or modified terms to maturity of generally not more than 30 years with monthly payments during the first year calculated on the basis of an assumed interest rate that will be lower than the Mortgage Rate applicable to such mortgage loan in subsequent years. Deferred Interest, if any, will be added to the principal balance of such mortgage loans; (4) Balloon mortgage loans ('Balloon Loans'), which are mortgage loans having original or modified terms to maturity of generally 5 to 15 years as described in the related Prospectus Supplement, which may have level monthly payments of principal and interest based generally on a 10- to 30-year amortization schedule. The amount of the monthly payment may remain constant until the maturity date, upon which date the full outstanding principal balance on such Balloon Loan will be due and payable (such amount, the 'Balloon Amount'); (5) Modified mortgage loans ('Modified Loans'), which are fixed or adjustable-rate mortgage loans providing for terms at the time of modification of generally not more than 30 years. Modified Loans may be mortgage loans which have been consolidated and/or have had various terms changed, mortgage loans which have been converted from adjustable rate mortgage loans to fixed rate mortgage loans, or construction loans which have been converted to permanent mortgage loans; (6) Another type of mortgage loan described in the related Prospectus Supplement; or (7) As more fully described in the related Prospectus Supplement, the Mortgage Loans may consist, in whole or in part, of Revolving Credit Line Loans. Interest on each Revolving Credit Line Loan, excluding introductory rates offered from time to time during promotional periods, may be computed and payable monthly on the average daily outstanding principal balance of such loan. From time to time prior to the expiration of the related draw period specified in a Revolving Credit Line Loan, principal amounts on such Revolving Credit Line Loan may be drawn down (up to a maximum amount as set forth in the related Prospectus Supplement) or repaid. If specified in the related Prospectus Supplement, new draws by borrowers under the Revolving Credit Line Loans will automatically become part of the Trust Estate described in such Prospectus Supplement. As a result, the aggregate balance of the Revolving Credit Line Loans will fluctuate from day to day as new draws by borrowers are added to the Trust Estate and principal payments are applied to such balances and such amounts will usually differ each day, as more specifically described in the related Prospectus Supplement. Under certain circumstances, under a Revolving Credit Line Loan, a borrower may, during the related draw period, choose an interest only payment option, during which the borrower is obligated to pay only the amount of interest which accrues on the loan during the billing cycle, and may also elect to pay all or a portion of the principal. An interest only payment option may terminate at the end of the related draw period, after which the borrower must begin paying at least a minimum monthly portion of the average outstanding principal balance of the loan. If provided for in the related Prospectus Supplement, a Mortgage Pool may contain either or both of the following types of mortgage loans (i) ARM Loans which allow the Mortgagors to convert the adjustable rates on such Mortgage Loans to a fixed rate at some point during the life of such Mortgage Loans and (ii) fixed rate mortgage loans which allow the Mortgagors to convert the fixed rates on such Mortgage Loans to an adjustable 26 rate at some point during the life of such Mortgage Loans (each such Mortgage Loan described in (i) and (ii) above, a 'Convertible Mortgage Loan'). If provided for in the related Prospectus Supplement, certain of the Mortgage Loans may be Buydown Mortgage Loans pursuant to which the monthly payments made by the Mortgagor during the Buydown Period will be less than the scheduled monthly payments on the Mortgage Loan, the resulting difference to be made up from (i) Buydown Funds funded by the Originator of the Mortgaged Property or another source (including the Master Servicer or the related Originator) and placed in the Buydown Account and (ii) if the Buydown Funds are contributed on a present value basis, investment earnings on such Buydown Funds. See 'Description of the Securities--Payments on Mortgage Loans; Deposits to Distribution Account.' The terms of the Buydown Mortgage Loans, if such loans are included in a Trust, will be as set forth in the related Prospectus Supplement. The Sponsor will cause the Mortgage Loans constituting each Mortgage Pool to be assigned to the Trustee named in the related Prospectus Supplement, for the benefit of the holders of all of the Securities of a series. The Master Servicer named in the related Prospectus Supplement will service the Mortgage Loans, either directly or through other mortgage servicing institutions (Sub-Servicers), pursuant to a Pooling and Servicing Agreement and will receive a fee for such services. See 'Mortgage Loan Program' and 'Description of the Securities.' With respect to those Mortgage Loans serviced by the Master Servicer through a Sub-Servicer, the Master Servicer will remain liable for its servicing obligations under the related Pooling and Servicing Agreement as if the Master Servicer alone were servicing such Mortgage Loans, unless otherwise described in the related Prospectus Supplement. The Sponsor and/or certain Originators may make certain representations and warranties regarding the Mortgage Loans, but its assignment of the Mortgage Loans to the Trustee will be without recourse. See 'Description of the Securities--Assignment of Mortgage Loans.' The Master Servicer's obligations with respect to the Mortgage Loans will consist principally of its contractual servicing obligations under the related Pooling and Servicing Agreement (including its obligation to enforce certain purchase and other obligations of Sub-Servicers and of Originators, as more fully described herein under 'Mortgage Loan Program--Representations by Originators,' '--Sub-Servicing by Originators' and 'Description of the Securities--Assignment of Mortgage Loans,' and its obligation, if any, to make certain cash advances in the event of delinquencies in payments on or with respect to the Mortgage Loans and interest shortfalls due to prepayment of Mortgage Loans, in amounts described herein under 'Description of the Securities--Advances'). The obligation of the Master Servicer to make delinquency advances will be limited to amounts which the Master Servicer believes ultimately would be reimbursable out of the proceeds of liquidation of the Mortgage Loans. See 'Description of the Securities--Advances.' MORTGAGE LOAN PROGRAM As a general matter, the Sponsor's Mortgage Loan program will consist of the origination and packaging of Mortgage Loans relating to non-conforming credits. For purposes hereof, 'non-conforming credit' means a mortgage loan which, based upon standard underwriting guidelines, is ineligible for purchase by FNMA or FHLMC due to credit characteristics that do not meet FNMA or FHLMC guidelines, respectively. However, certain of the Mortgage Loans will relate to FNMA or FHLMC conforming credits. The Mortgagors generally will have taken out the related Mortgage Loans for one or more of four reasons: (i) to purchase the related Mortgaged Property, (ii) to refinance an existing mortgage loan on more favorable terms, (iii) to consolidate debt, or (iv) to obtain cash proceeds by borrowing against the Mortgagor's equity in the related Mortgaged Property; the Mortgage Loans described in (i) are commonly referred to as purchase money loans and the Mortgage Loans described in (ii), (iii) and (iv) on the whole are commonly referred to as home equity loans. It is the Sponsor's practice to solicit existing Mortgagors with respect to the possible refinancing of their existing Mortgages. 27 UNDERWRITING GUIDELINES As more fully described below under 'Qualifications of Originators' and as may also be described in greater detail in the related Prospectus Supplement, there are various types of Originators that may participate in the Sponsor's Mortgage Loan Program. Under the Sponsor's Mortgage Loan Program, the Sponsor purchases and originates Mortgage Loans pursuant to three types of underwriting guidelines: (1) standard underwriting guidelines according to the Sponsor's Originator Guide, as modified from time to time, used by Affiliated Originators and Unaffiliated Originators ('Sponsor's Guidelines'), (2) underwriting guidelines utilized by certain Unaffiliated Originators and approved by the Sponsor ('Approved Guidelines'), and (3) underwriting guidelines ('Bulk Guidelines') used by Unaffiliated Originators of portfolios of Mortgage Loans subsequently purchased in whole or part by the Sponsor as bulk acquisitions ('Bulk Acquisitions'). The respective underwriting guidelines are described below. Sponsor's Guidelines. The Sponsor's Guidelines are set forth in the Sponsor's Originator Guide. The Sponsor's Guidelines are revised continuously based on opportunities and prevailing conditions in the nonconforming credit residential mortgage market, as well as the expected market for the resulting Securities. Mortgage Loans originated by Affiliated Originators generally will, and Mortgage Loans originated by Unaffiliated Originators may have been, originated in accordance with the Sponsor's Guidelines as set forth in the Sponsor's Originator Guide. However, certain of the Mortgage Loans may be employee or preferred customer loans with respect to which, in accordance with such Affiliate's mortgage loan programs, no income or asset verifications were required. In addition, certain Originators may originate Mortgage Loans in satisfaction of specified requirements of federal or state law applicable to certain Originators, such as, by way of illustration, the federal Community Reinvestment Act of 1977, which is applicable to banks; such Mortgage Loans generally will not have been originated pursuant to the Sponsor's standard underwriting guidelines applicable to nonconforming loans but may have been originated pursuant to alternative guidelines applicable to such loans. The Sponsor will not review any Affiliated Originator mortgage loans for conformity with the Sponsor's Guidelines set forth in the Sponsor's Originator Guide. The Sponsor generally will review or cause to be reviewed only a limited portion of the Mortgage Loans in any delivery of Mortgage Loans from Unaffiliated Originators for conformity with the Sponsor's Originator Guide. The following is a brief description of the Sponsor's Guidelines set forth in the Sponsor's Originator Guide customarily and currently employed by the Sponsor. The Sponsor believes that these standards are consistent with those generally used by lenders in the business of making mortgage loans based on non-conforming credits. The underwriting process is intended to assess both the prospective borrower's ability to repay and the adequacy of the real property as collateral for the loan granted. The general appreciation in value of real estate experienced in the past has been a factor in limiting the Master Servicer's loss experience on its portfolio of one- to four-family residential mortgage loans. However, the past pattern of appreciation in value of the real property securing such loans has not continued, and a depreciation in value has occurred and may continue to occur in some market areas, and may occur in others. The Sponsor's Guidelines permit the origination and purchase of mortgage loans with multi-tiered credit characteristics tailored to individual credit profiles. In general, the Sponsor's Guidelines require an analysis of the equity in the collateral, the payment history of the borrower, the borrower's ability to repay debt, the property type, and the characteristics of the underlying first mortgage, if any. A lower maximum CLTV is required for lower gradations of credit quality and higher property values. The Sponsor's Guidelines permit the origination or purchase of fixed or adjustable rate loans that either fully amortize over a period generally not to exceed 30 years or, in the case of a balloon mortgage, generally amortize based on a 30-year or less amortization schedule with a due date and a 'balloon' payment due prior to the 30 year period. The homes used for collateral to secure the loans may be either owner occupied (which includes second and vacation homes) or non-owner occupied investor properties which, in either case are single-family residences (which may be detached, part of a two- to four-family dwelling, a condominium unit or a unit in a planned unit development). The Sponsor's Guidelines require that the CLTV of a Mortgage Loan generally not exceed 85%, after taking into account the amount of any primary mortgage insurance applicable to such Mortgage Loan. 28 If a senior mortgage exists, the lender may first review the senior mortgage documentation. If it contains open end advance or negative amortization provisions, the maximum potential senior mortgage balance may be used, although for certain of the Sponsor's products the current balance may be used in calculating the CLTV which determines the maximum loan amount. The Sponsor's Guidelines do not permit the origination or purchase of loans where the senior mortgage contains a provision pursuant to which the senior mortgagee may share in any appreciation of the Mortgaged Property. In most cases, the value of each property proposed as security for a mortgage loan is required to be determined by a full appraisal. A limited appraisal of a property, conducted on a drive-by basis, may be utilized. Two full appraisals are generally required for properties valued over $500,000. Appraisals are required to be completed by qualified professional appraisers. The Sponsor evaluates the performance of appraisers and maintains a current disapproved appraiser list. The Sponsor's Guidelines have provided for the origination of loans under three general loan programs: (i) a full verification program for salaried or self-employed borrowers, (ii) a 'lite' documentation program for borrowers who may have income which cannot be verified by traditional methods and (iii) a non-income verification program for self-employed borrowers only. However, the Sponsor's Guidelines allow for certain borrowers with existing loans to refinance such loans with either limited, or no, verification of income. The Sponsor may also purchase pools of loans which may include some loans originated under a non-income verification program. For the Sponsor's full verification process, each mortgage applicant is required to provide, and the Sponsor or its designee is required to verify, personal financial information. The applicant's total monthly obligations (including principal and interest on each mortgage, tax assessments, other loans, charge accounts and all other scheduled indebtedness) generally (in the absence of countervailing considerations, such as a lower Combined Loan-to-Value Ratio or a price adjustment) should not exceed the applicant's ability to pay. Applicants who are salaried employees must provide current employment information in addition to recent employment history. The Sponsor or its designee verify this information for salaried borrowers based on written confirmation from employers or a combination of the most recent pay stub, the most recent W-2 tax form and telephone confirmation from the employer. Self-employed applicants are generally required to be self-employed in the same field for a minimum of two years. The self-employed applicant is generally required to provide personal and business financial statements and signed copies of complete federal income tax returns (including schedules) filed for the most recent two years. For the Sponsor's 'lite' documentation program the borrower must establish proof of cash flow trends to support the borrower's income. Such proof can include business bank statements or personal bank statements. For the Sponsor's non-income verifier program, proof of two year's history of self-employment plus proof of current self-employed status is required. The applicant's debt-to-income ratio is calculated based on income as certified by the borrower on the application and must be reasonable. A credit report by an independent, nationally recognized credit reporting agency is required reflecting the applicant's complete credit history. The credit report should reflect all delinquencies of 30 days or more, repossessions, judgments, foreclosures, garnishments, bankruptcies and similar instances of adverse credit that can be discovered by a search of public records. Verification is required to be obtained of the senior mortgage balance, if any, the status and whether local taxes, interest, insurance and assessments are included in the applicant's monthly payment. All taxes and assessments not included in the payment are required to be verified as current. In connection with purchase-money loans, the Sponsor's Guidelines require (x) (i) an acceptable source of downpayment funds, (ii) verification of the source of the downpayment funds and (iii) adequate cash reserves or (y) adequate equity in the collateral property. Certain laws protect loan applicants by offering them a time frame after loan documents are signed, termed the rescission period, during which the applicant has the right to cancel the loan. The rescission period must have expired prior to funding a loan and may not be waived by the applicant except as permitted by law. Unless otherwise disclosed in the related Prospectus Supplement, the Sponsor's Guidelines generally require title insurance coverage issued by an approved ALTA or CLTA title insurance company on each Mortgage Loan it purchases. The Sponsor, the related Originator and/or their assignees generally are named as the insured. Title 29 insurance policies indicate the lien position of the mortgage loan and protect the insured against loss if the title or lien position is not as indicated. The applicant is required to secure property insurance in an amount sufficient to cover the new loan and any prior mortgage. If the sum of the outstanding first mortgage, if any, and the related mortgage loan exceeds replacement value (the cost of rebuilding the subject property, which generally does not include land value), insurance equal to replacement value may be accepted. The Sponsor or its designee is required to ensure that its name and address is properly added to the 'Mortgagee Clause' of the insurance policy. In the event the Sponsor or the related Originator's name is added to a 'Loss Payee Clause' and the policy does not provide for written notice of policy changes or cancellation, an endorsement adding such provision is required. Approved Guidelines. The Sponsor may cause a Trust to acquire Mortgage Loans underwritten pursuant to underwriting guidelines that may differ from the Sponsor's Guidelines as set forth in the Sponsor's Originator Guide. Certain of the Mortgage Loans will be acquired in negotiated transactions, and such negotiated transactions may be governed by agreements ('Master Commitments') relating to ongoing acquisitions of Mortgage Loans by the Sponsor, from Originators who will represent that the Mortgage Loans have been originated in accordance with underwriting guidelines agreed to by the Sponsor. Certain other Mortgage Loans will be acquired from Originators that will represent that the Mortgage Loans were originated pursuant to underwriting guidelines determined by a mortgage insurance company acceptable to the Sponsor. The Sponsor will accept a certification from such insurance company as to a Mortgage Loan's insurability in a mortgage pool as of the date of certification as evidence of a Mortgage Loan conforming to applicable underwriting standards. Such certifications likely will have been issued before the purchase of the Mortgage Loan by the Sponsor. The Sponsor only will perform random quality assurance reviews on Mortgage Loans delivered with such certifications. The underwriting standards utilized in negotiated transactions and Master Commitments and the underwriting standards of insurance companies may vary substantially from the Sponsor's Guidelines. All of the underwriting guidelines will provide an underwriter with information to evaluate either the security for the related Mortgage Loan, which security consists primarily of the borrower's repayment ability or the adequacy of the Mortgaged Property as collateral, or a combination of both. Due to the variety of underwriting guidelines and review procedures that may be applicable to the Mortgage Loans included in any Mortgage Pool, the related Prospectus Supplement will not distinguish among the various underwriting guidelines applicable to the Mortgage Loans nor describe any review for compliance with applicable underwriting guidelines performed by the Sponsor. Moreover, there can be no assurance that every Mortgage Loan was originated in conformity with the Approved Guidelines in all material respects, or that the quality or performance of Mortgage Loans underwritten pursuant to varying guidelines as described above will be equivalent under all circumstances. Bulk Guidelines. Bulk portfolios of Mortgage Loans may be originated by a variety of Originators under several different underwriting guidelines. For bulk portfolios which are seasoned for a period of time, the Sponsor's underwriting review of bulk portfolios of Mortgage Loans focuses primarily on payment histories and estimated current values based on estimated property appreciation or depreciation and loan amortization. Mortgage Loans that conform to the related Bulk Guidelines may not conform to the requirements of either the Sponsor's Guidelines or the Approved Guidelines. For example, the Sponsor may purchase Mortgage Loans in bulk portfolios with Combined Loan-to-Value Ratios in excess of that required under the Sponsor's Guidelines, without title insurance, or with nonconforming appraisal methods such as tax assessments. Bulk Acquisition portfolios may be purchased servicing released or retained. If servicing is retained, the Originator must meet certain minimum requirements, as modified from time to time, by the Sponsor. The Sponsor generally will cause the Mortgage Loans acquired in a Bulk Acquisition to be reunderwritten on a sample basis. Such reunderwriting may be performed by the Sponsor, the Master Servicer or by a third party acting at the direction of the Sponsor. Quality Control. The Master Servicer maintains a quality control department which generally reviews loans originated by Affiliated Originators. The quality control department randomly selects a portion of the files for underwriting review. The Sponsor or its Affiliated Originators also cause appraisal reviews to be performed on a random sample of loan production. A periodic report is distributed to senior management and the production offices describing material exceptions to underwriting and appraisal guidelines, legal and regulatory requirements and variances based on the 30 reverification process. Appraisers demonstrating chronic errors, omissions or large valuation errors are removed from the approved appraiser list. Training programs, additional audits and performance evaluations for underwriting personnel and management are influenced by the results of the quality control review. The Sponsor generally will cause Mortgage Loans acquired from Unaffiliated Originators to be (i) reunderwritten for the purpose of determining whether such Mortgage Loans were originated in accordance with the applicable underwriting guidelines, (ii) reviewed to assess the accuracy of the appraised values, and (iii) audited to determine the accuracy of the loan computer system as compared to the loan files. Such process may consist of a review of all such Mortgage Loans or may be performed on a sample basis. Such reunderwriting may be performed by the Sponsor, the Master Servicer or a third party acting at the direction of the Sponsor. QUALIFICATIONS OF ORIGINATORS Each Originator from which a Mortgage Loan is acquired will have been accepted by the Sponsor for participation in the Sponsor's mortgage loan program. Certain Unaffiliated Originators ('Conduit Participants') may be qualified to enter into agreements to sell mortgage loans to the Sponsor pursuant to Master Commitments which provide for the periodic purchase and sale of loans meeting certain specified requirements. Loans acquired from Unaffiliated Originators other than Conduit Participants will be acquired on a 'spot' basis, or in connection with a Bulk Acquisition. Unless otherwise described in the related Prospectus Supplement with respect to certain specified Unaffiliated Originators (in which case any remedies for breach will lie only against such Unaffiliated Originator), the Sponsor will make directly, or will guarantee compliance with, any representations and warranties made by any Unaffiliated Originator, with respect to the Mortgage Loans originated by it and acquired by a Trust. All Conduit Participants must have received a satisfactory review by the Sponsor of its operating procedures. All Unaffiliated Originators will have delinquency and foreclosure rates monitored and maintained at levels acceptable to the Sponsor. All Unaffiliated Originators are required to originate mortgage loans in accordance with the applicable underwriting standards. However, with respect to any Originator, some of the generally applicable underwriting standards described herein and in the Sponsor's Originator Guide may be modified or waived with respect to certain Mortgage Loans originated by such Originators. The Resolution Trust Corporation (the 'RTC') or the Federal Deposit Insurance Corporation (the 'FDIC') (either in their respective corporate capacities or as receiver or conservator for a depository institution) may also be an Originator of the Mortgage Loans. The RTC and the FDIC are together referred to as the 'Federal Corporations'. The RTC was established pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ('FIRREA'), which was enacted in response to the financial crisis of the thrift industry and the Federal Savings and Loan Insurance Corporation. The purpose of FIRREA is to restore the public's confidence in the savings and loan industry in order to ensure a viable system of affordable housing finance as well as to improve the supervision of savings associations and promote the independence of the FDIC. The FDIC is an independent executive agency originally established by the Banking Act of 1933 to insure the deposits of all banks entitled to federal deposit insurance under the Federal Reserve Act and Federal Deposit Insurance Act. The FDIC administers the system of nationwide deposit insurance (mutual guaranty of deposits) for United States Banks and, together with the United States Comptroller of the Currency, regulates in areas related to the maintenance of reserves for certain types of deposits, the maintenance of certain financial ratios, transactions with affiliates and a broad range of other banking practices. The Sponsor monitors the Originators and the Sub-Servicers under the control of a Federal Corporation, as well as those Originators and Sub-Servicers that are insolvent or in receivership or conservatorship or otherwise financially distressed. Such Originators may not be able or permitted to repurchase Mortgage Loans for which there has been a breach of representation and warranty. Moreover, any such Originator may make no representations and warranties with respect to Mortgage Loans sold by it. The Federal Corporations (either in their respective corporate capacities or as receiver for a depository institution) may also originate Mortgage Loans, in which event neither the related Federal Corporation nor the depository institution for which such Federal Corporation is acting as receiver may make representations and warranties with respect to the Mortgage Loans that such Federal Corporation sells, or such Federal Corporation may make only limited representations and warranties (for example, that the related legal documents are enforceable). A Federal Corporation may have 31 no obligation to repurchase any Mortgage Loan for a breach of a representation and warranty. If as a result of a breach of representation and warranty an Originator is required to repurchase a Mortgage Loan but is not permitted or otherwise fails to do so or if representations and warranties are not made by an Originator, to the extent that neither the Sponsor nor any other entity has assumed the representations and warranties or made representations and warranties, neither the Sponsor nor that entity will be required to repurchase such Mortgage Loan and, consequently such Mortgage Loan will remain in the related Mortgage Pool and any related losses will be borne by the Securityholders or by the related Credit Enhancement, if any. In addition, loans which are purchased either directly or indirectly from a Federal Corporation may be subject to a contract right of such Federal Corporation to repurchase such loans under certain limited circumstances. SUB-SERVICERS Each Originator of a Mortgage Loan will act as Sub-Servicer for such Mortgage Loan pursuant to an agreement between the Master Servicer and the Sub-Servicer (a 'Sub-Servicing Agreement') unless the servicing obligations are released to the Master Servicer or transferred to a servicer approved by the Master Servicer. An Affiliated Originator of a Mortgage Loan may act as the Sub-Servicer for such Mortgage Loan unless the other related servicing obligations are released or transferred. An Unaffiliated Originator acting as a Sub-Servicer for the Mortgage Loans will be required to meet certain additional standards with respect to its mortgage loan servicing portfolio, GAAP tangible net worth and other specified qualifications. REPRESENTATIONS BY ORIGINATORS Unless otherwise specified in the related Prospectus Supplement, each Originator will have made representations and warranties in respect of the Mortgage Loans sold by such Originator and evidenced by a series of Securities. Such representations and warranties generally include, among other things, that at the time of the sale by the Originator to the Sponsor of each Mortgage Loan: (i) the information with respect to each Mortgage Loan set forth in the Schedules of Mortgage Loans is true and correct as of the related Cut-Off Date; (ii) each Mortgage Loan being transferred to the Trust which is a REMIC is a qualified mortgage under the REMIC provisions of the Code and is a Mortgage; (iii) each Mortgaged Property is improved by a single (one- to four-) family residential dwelling or a multi-family structure, which may include condominiums and townhouses; (iv) each Mortgage Loan had, at the time of origination, either an attorney's certification of title or a title search or title policy; (v) as of the related Cut-Off Date each Mortgage Loan is secured by a valid and subsisting lien of record on the Mortgaged Property having the priority indicated on the related Schedule of Mortgage Loans subject in all cases to exceptions to title set forth in the title insurance policy, if any, with respect to the related Mortgage Loan; (vi) each Originator held good and indefeasible title to, and was the sole owner of, each Mortgage Loan conveyed by such Originator; and (vii) each Mortgage Loan was originated in accordance with law and is the valid, legal and binding obligation of the related Mortgagor. Unless otherwise described in the related Prospectus Supplement, all of the representations and warranties of an Originator in respect of a Mortgage Loan will be made as of the date on which such Originator sells the Mortgage Loan to the Sponsor; the date as of which such representations and warranties are made thus may be a date prior to the date of the issuance of the related series of Securities. A substantial period of time may elapse between the date as of which the representations and warranties are made and the later date of issuance of the related series of Securities. The Sponsor will assign to the Trustee for the benefit of the holders of the related series of Securities all of its right, title and interest in each agreement by which it acquires a Mortgage Loan from an Originator insofar as such agreement relates to the representations and warranties made by an Originator in respect of such Mortgage Loan and any remedies provided for breach of such representations and warranties. If an Originator cannot cure a breach of any representation or warranty made by it in respect of a Mortgage Loan that materially and adversely affects the interests of the Securityholders in such Mortgage Loan within a time period specified in the related Pooling and Servicing Agreement, such Originator and/or the Sponsor will be obligated to purchase from the related Trust such Mortgage Loan at a price (the 'Loan Purchase Price') set forth in the related Pooling and Servicing Agreement which Loan Purchase Price will be equal to the principal balance thereof as of the date of purchase plus one month's interest at the Mortgage Rate less the amount, expressed as a percentage per annum, payable in respect of master servicing compensation or subservicing compensation, as applicable, and the 32 Originator's Retained Yield, if any, together with, without duplication, the aggregate amount of all delinquent interest, if any. Unless otherwise specified in the related Prospectus Supplement, as to any such Mortgage Loan required to be purchased by an Originator and/or the Sponsor, as provided above, rather than repurchase the Mortgage Loan, the Master Servicer may, at its sole option, remove such Mortgage Loan (a 'Deleted Mortgage Loan') from the related Trust and cause the Sponsor to substitute in its place another Mortgage Loan of like kind (a 'Qualified Replacement Mortgage' as such term is defined in the related Pooling and Servicing Agreement). With respect to a Trust for which a REMIC election is to be made, except as otherwise provided in the Prospectus Supplement relating to a series of Securities, such substitution of a defective Mortgage Loan must be effected within two years of the date of the initial issuance of the Securities, and may not be made if such substitution would cause the Trust to not qualify as a REMIC or result in a prohibited transaction tax under the Code. Unless otherwise specified in the related Prospectus Supplement or Pooling and Servicing Agreement, an Unaffiliated Originator generally will have no option to substitute for a Mortgage Loan that it is obligated to repurchase in connection with a breach of a representation and warranty. The Master Servicer will be required under the applicable Pooling and Servicing Agreement to enforce such purchase or substitution obligations for the benefit of the Trustee and the Securityholders, following the practices it would employ in its good faith business judgment if it were the owner of such Mortgage Loan; provided, however, that this purchase or substitution obligation will in no event become an obligation of the Master Servicer in the event the Originator fails to honor such obligation. If the Originator fails to repurchase or substitute a loan and no breach of the Sponsor's representations has occurred, the Originator's purchase obligation will in no event become an obligation of the Sponsor. Unless otherwise specified in the related Prospectus Supplement, the foregoing will constitute the sole remedy available to Securityholders or the Trustee for a breach of representation by an Originator in its capacity as a seller of Mortgage Loans to the Sponsor. Unless otherwise described in the related Prospectus Supplement with respect to certain Unaffiliated Originators (in which case any remedies for breach will lie only against such Unaffiliated Originator), the Sponsor will make directly, or will guarantee compliance with, any representations and warranties made by any Unaffiliated Originator with respect to the Mortgage Loans originated or purchased by it and acquired by a Trust. Notwithstanding the foregoing with respect to any Originator that requests the Master Servicer's consent to the transfer of sub-servicing rights relating to any Mortgage Loans to a successor servicer, the Master Servicer may release such Originator from liability, under its representations and warranties described above, upon the assumption by such successor servicer of the Originator's liability for such representations and warranties as of the date they were made. In that event, the Master Servicer's rights under the instrument by which such successor servicer assumes the Originator's liability will be assigned to the Trustee, and such successor servicer shall be deemed to be the 'Originator' for purposes of the foregoing provisions. SUB-SERVICING BY ORIGINATORS Each Originator of a Mortgage Loan will act as the Sub-Servicer for such Mortgage Loan pursuant to a Sub-Servicing Agreement unless servicing is released to the Master Servicer or has been transferred to a servicer approved by the Master Servicer. The Master Servicer may, in turn, assign such sub-servicing to designated sub-servicers that will be qualified Originators and may include affiliates of the Sponsor. While such a Sub-Servicing Agreement will be a contract solely between the Master Servicer and the Sub-Servicer, the Pooling and Servicing Agreement pursuant to which a series of Securities is issued will provide that, if for any reason the Master Servicer for such series of Securities is no longer the master servicer of the related Mortgage Loans, the Trustee or any successor Master Servicer must recognize the Sub-Servicer's rights and obligations under such Sub-Servicing Agreement. Unless otherwise specified in the related Prospectus Supplement, with the approval of the Master Servicer, a Sub-Servicer may delegate its servicing obligations to third-party servicers, but such Sub-Servicer will remain obligated under the related Sub-Servicing Agreement. Each Sub-Servicer will be required to perform the customary functions of a servicer, including collection of payments from Mortgagors and remittance of such collections to the Master Servicer; maintenance of hazard insurance and filing and settlement of claims thereunder, subject in certain cases to the right of the Master Servicer to approve in advance any such settlement; 33 maintenance of escrow or impound accounts of Mortgagors for payment of taxes, insurance and other items required to be paid by the Mortgagor pursuant to the Mortgage Loan; processing of assumptions or substitutions; attempting to cure delinquencies; supervising foreclosures; inspecting and managing Mortgaged Properties under certain circumstances; and maintaining accounting records relating to the Mortgage Loans. A Sub-Servicer also may be obligated to make advances to the Master Servicer in respect of delinquent installments of principal and/or interest (net of any sub-servicing or other compensation) on Mortgage Loans, as described more fully under 'Description of the Securities--Advances,' and in respect of certain taxes and insurance premiums not paid on a timely basis by Mortgagors. A Sub-Servicer may also be obligated to deposit amounts in respect of Compensating Interest to the related Principal and Interest Account in connection with prepayments of principal received and applied to reduce the outstanding principal balance of a Mortgage Loan. No assurance can be given that the Sub-Servicers will carry out their advance or payment obligations, if any, with respect to the Mortgage Loans. Unless otherwise specified in the related Prospectus Supplement, a Sub-Servicer may transfer its servicing obligations to another entity that has been approved for participation in the Sponsor's loan purchase programs, but only with the prior written approval of the Master Servicer. As compensation for its servicing duties, the Sub-Servicer may be entitled to a Base Servicing Fee. The Sub-Servicer may also be entitled to collect and retain, as part of its servicing compensation, any late charges or prepayment penalties provided in the Mortgage Note or related instruments. The Sub-Servicer will be entitled to reimbursement for certain expenditures that it makes, generally to the same extent that the Master Servicer would be reimbursed under the applicable Pooling and Servicing Agreement. See 'The Pooling and Servicing Agreement--Servicing and Other Compensation and Payment of Expenses; Originator's Retained Yield.' Each Sub-Servicer will be required to agree to indemnify the Master Servicer for any liability or obligation sustained by the Master Servicer in connection with any act or failure to act by the Sub-Servicer in its servicing capacity. Each Sub-Servicer is required to maintain a fidelity bond and an errors and omission policy with respect to its officers, employees and other persons acting on its behalf or on behalf of the Master Servicer. Each Sub-Servicer will be required to service each Mortgage Loan pursuant to the terms of the Sub-Servicing Agreement for the entire term of such Mortgage Loan, unless the Sub-Servicing Agreement is terminated earlier by the Master Servicer or unless servicing is released to the Master Servicer. The Master Servicer generally may terminate a Sub-Servicing Agreement immediately upon the giving of notice upon certain stated events, including the violation of such Sub-Servicing Agreement by the Sub-Servicer, or following a specified period after notice to the Sub-Servicer without cause upon payment of an amount equal to a specified termination fee calculated as a specified percentage of the aggregate outstanding principal balance of all mortgage loans, including the Mortgage Loans serviced by such Sub-Servicer pursuant to a Sub-Servicing Agreement and certain transfer fees. The Master Servicer may agree with a Sub-Servicer to amend a Sub-Servicing Agreement. Upon termination of a Sub-Servicing Agreement, the Master Servicer may act as servicer of the related Mortgage Loans or enter into one or more new Sub-Servicing Agreements. If the Master Servicer acts as servicer, it will not assume liability for the representations and warranties of the Sub-Servicer that it replaces. If the Master Servicer enters into a new Sub-Servicing Agreement, each new Sub-Servicer either must be an Originator, meet the standards for becoming an Originator or have such servicing experience that is otherwise satisfactory to the Master Servicer. The Master Servicer may make reasonable efforts to have the new Sub-Servicer assume liability for the representations and warranties of the terminated Sub-Servicer, but no assurance can be given that such an assumption will occur and, in any event, if the new Sub-Servicer is an affiliate of the Master Servicer, the liability for such representations and warranties will not be assumed by such new Sub-Servicer. In the event of such an assumption, the Master Servicer may in the exercise of its business judgment release the terminated Sub-Servicer from liability in respect of such representations and warranties. Any amendments to a Sub-Servicing Agreement or to a new Sub-Servicing Agreement may contain provisions different from those described above that are in effect in the original Sub-Servicing Agreements. However, the Pooling and Servicing Agreement for each Trust Estate will provide that any such amendment or new agreement may not be inconsistent with such Pooling and Servicing Agreement to the extent that it would materially and adversely affect the interests of the Securityholders. 34 DESCRIPTION OF THE SECURITIES GENERAL The Securities will be issued in series. Each series of Securities (or, in certain instances, two or more series of Securities) will be issued pursuant to a Pooling and Servicing Agreement. The following summaries (together with additional summaries under 'The Pooling and Servicing Agreement' below) describe all material terms and provisions relating to the Securities common to each Pooling and Servicing Agreement. The summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Pooling and Servicing Agreement for the related Trust and the related Prospectus Supplement. The Securities will consist of two basic types: (i) Securities of the fixed-income type ('Fixed-Income Securities') and (ii) Securities of the equity participation type ('Equity Securities'). No Class of Equity Securities will be offered pursuant to this Prospectus or any Prospectus Supplement related hereto. Fixed-Income Securities generally will be styled as debt instruments, having a principal balance and a specified interest rate ('Interest Rate'). Fixed-Income Securities may be either beneficial ownership interests in the related Mortgage Loans held by the related Trust, or may represent debt secured by such Mortgage Loans. Each series or class of Fixed-Income Securities may have a different Interest Rate, which may be a fixed, variable or adjustable Interest Rate. The related Prospectus Supplement will specify the Interest Rate for each series or class of Fixed-Income Securities, or the initial Interest Rate and the method for determining subsequent changes to the Interest Rate. A series may include one or more classes of Fixed-Income Securities ('Strip Securities') entitled to (i) principal distributions, with disproportionate, nominal or no interest distributions, or (ii) interest distributions, with disproportionate, nominal or no principal distributions. In addition, a series may include two or more classes of Fixed-Income Securities that differ as to timing, sequential order, priority of payment, Interest Rate or amount of distributions of principal or interest or both, or as to which distributions of principal or interest or both on any class may be made upon the occurrence of specified events, in accordance with a schedule or formula, or on the basis of collections from designated portions of the related Mortgage Pool, which series may include one or more classes of Fixed-Income Securities ('Accrual Securities'), as to which certain accrued interest will not be distributed but rather will be added to the principal balance (or nominal principal balance in the case of Accrual Securities which are also Strip Securities) thereof on each Payment Date, as hereinafter defined and in the manner described in the related Prospectus Supplement. If so provided in the related Prospectus Supplement, a series of Securities may include one or more classes of Fixed-Income Securities (collectively, the 'Senior Securities') that are senior to one or more classes of Fixed-Income Securities (collectively, the 'Subordinate Securities') in respect of certain distributions of principal and interest and allocations of losses on Mortgage Loans. In addition, certain classes of Senior (or Subordinate) Securities may be senior to other classes of Senior (or Subordinate) Securities in respect of such distributions or losses. Equity Securities will represent the right to receive the proceeds of the related Trust Estate after all required payments have been made to the Securityholders of the related Fixed-Income Securities (both Senior Securities and Subordinate Securities), and following any required deposits to any reserve account that may be established for the benefit of the Fixed-Income Securities. Equity Securities may constitute what are commonly referred to as the 'residual interest,' 'seller's interest' or the 'general partnership interest,' depending upon the treatment of the related Trust for federal income tax purposes. As distinguished from the Fixed-Income Securities, the Equity Securities will not be styled as having principal and interest components. Any losses suffered by the related Trust first will be absorbed by the related class of Equity Securities, as described herein and in the related Prospectus Supplement. No Class of Equity Securities will be offered pursuant to this Prospectus or any Prospectus Supplement related hereto. Equity Securities may be offered on a private placement basis or pursuant to a separate Registration Statement to be filed by the Sponsor. In addition, the Sponsor and its affiliates may initially or permanently hold any Equity Securities issued by any Trust. General Payment Terms of Securities. As provided in the related Pooling and Servicing Agreement and as described in the related Prospectus Supplement, Securityholders will be entitled to receive payments on their 35 Securities on specified dates ('Payment Dates'). Payment Dates with respect to Fixed-Income Securities will occur monthly, quarterly or semi-annually, as described in the related Prospectus Supplement; Payment Dates with respect to Equity Securities will occur as described in the related Prospectus Supplement. The related Prospectus Supplement will describe a date (the 'Record Date') preceding such Payment Date, as of which the Trustee or its paying agent will fix the identity of the Securityholders for the purpose of receiving payments on the next succeeding Payment Date. Unless otherwise described in the related Prospectus Supplement, the Payment Date will be the twenty-fifth day of each month (or, in the case of quarterly-pay Securities, the twenty-fifth day of every third month; and, in the case of semi-annually-pay Securities, the twenty- fifth day of every sixth month) and the Record Date will be the close of business as of the last day of the calendar month which precedes such Payment Date. The related Prospectus Supplement and the Pooling and Servicing Agreement will describe a period (a 'Remittance Period') antecedent to each Payment Date (for example, in the case of monthly-pay Securities, the calendar month preceding the month in which a Payment Date occurs or such other specified period). Unless otherwise provided in the related Prospectus Supplement, collections received on or with respect to the related Mortgage Loans during a Remittance Period will be required to be remitted by the Master Servicer to the related Trustee prior to the related Payment Date and will be used to distribute payments to Securityholders on such Payment Date. As may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of the principal collected on or with respect to the related Mortgage Loans may be applied by the related Trustee to the acquisition of additional Mortgage Loans during a specified period (rather than used to distribute payments of principal to Securityholders during such period) with the result that the related securities possess an interest-only period, also commonly referred to as a revolving period, which will be followed by an amortization period. Any such interest-only or revolving period may, upon the occurrence of certain events to be described in the related Prospectus Supplement, terminate prior to the end of the specified period and result in the earlier than expected amortization of the related Securities. In addition, and as may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of such collected principal may be retained by the Trustee (and held in certain temporary investments, including Mortgage Loans) for a specified period prior to being used to distribute payments of principal to Securityholders. The result of such retention and temporary investment by the Trustee of such principal would be to slow the amortization rate of the related Securities relative to the amortization rate of the related Mortgage Loans, or to attempt to match the amortization rate of the related Securities to an amortization schedule established at the time such Securities are issued. Any such feature applicable to any Securities may terminate upon the occurrence of events to be described in the related Prospectus Supplement, resulting in the current funding of principal payments to the related Securityholders and an acceleration of the amortization of such Securities. Unless otherwise specified in the related Prospectus Supplement, neither the Securities nor the underlying Mortgage Loans will be guaranteed or insured by any governmental agency or instrumentality or the Sponsor, the Master Servicer, any Sub-Servicer, any Originator or any of their affiliates. Unless otherwise specified in the Prospectus Supplement with respect to a series, Securities of each series covered by a particular Pooling and Servicing Agreement will evidence specified beneficial ownership interest in a separate Trust Estate created pursuant to such Pooling and Servicing Agreement. A Trust Estate will consist of, to the extent provided in the Pooling and Servicing Agreement: (i) a pool of Mortgage Loans (and the related mortgage documents) or certificates of interest or participations therein underlying a particular series of Securities as from time to time are subject to the Pooling and Servicing Agreement, exclusive of, if specified in the related Prospectus Supplement, any Originator's Retained Yield or other interest retained by the related Originator, the Sponsor or any of its affiliates with respect to each such Mortgage Loan; (ii) certain other assets including, without limitation, payments and collections in respect of the Mortgage Loans due, accrued or received, as described in the related Prospectus Supplement, on and after the related Cut-Off Date, as from time to time are identified as deposited in respect thereof in the Principal and Interest Account and in the related Distribution Account; (iii) property acquired by foreclosure of the Mortgage Loans or deed in lieu of foreclosure; (iv) hazard insurance policies and primary insurance policies, if any, and certain proceeds thereof; and (v) any combination, as specified in the related Prospectus Supplement, of a letter of credit, financial guaranty insurance 36 policy, purchase obligation, mortgage pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve fund or other type of Credit Enhancement as described under 'Description of Credit Enhancement.' To the extent that any Trust Estate includes certificates of interest or participations in Mortgage Loans, the related Prospectus Supplement will describe the material terms and conditions of such certificates or participations. FORM OF SECURITIES Unless otherwise specified in the related Prospectus Supplement, the Securities of each series will be issued as physical certificates ('Physical Certificates') in fully registered form only in the denominations specified in the related Prospectus Supplement, and will be transferable and exchangeable at the corporate trust office of the registrar of the Securities (the 'Security Registrar') named in the related Prospectus Supplement. No service charge will be made for any registration of exchange or transfer of Securities, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge. If so specified in the related Prospectus Supplement, specified classes of a series of Securities will be issued in uncertificated book-entry form ('Book-Entry Securities'), and will be registered in the name of Cede, the nominee of DTC. DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a 'clearing corporation' within the meaning of the Uniform Commercial Code ('UCC') and a 'clearing agency' registered pursuant to the provisions of Section 17A of the Securities Exchange Act of 1934, as amended. DTC was created to hold securities for its participating organizations ('Participants') and facilitate the clearance and settlement of securities transactions between Participants through electronic book-entry changes in their accounts, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and may include certain other organizations. Indirect access to the DTC system also is available to others such as brokers, dealers, banks and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly ('Indirect Participant'). Under a book-entry format, Securityholders that are not Participants or Indirect Participants but desire to purchase, sell or otherwise transfer ownership of Securities registered in the name of Cede, as nominee of DTC, may do so only through Participants and Indirect Participants. In addition, such Securityholders will receive all distributions of principal of and interest on the Securities from the Trustee through DTC and its Participants. Under a book-entry format, Securityholders will receive payments after the related Payment Date because, while payments are required to be forwarded to Cede, as nominee for DTC, on each such date, DTC will forward such payments to its Participants, which thereafter will be required to forward such payments to Indirect Participants or Securityholders. Unless and until Physical Securities are issued, it is anticipated that the only Securityholder will be Cede, as nominee of DTC, and that the beneficial holders of Securities will not be recognized by the Trustee as Securityholders under the Pooling and Servicing Agreement. The beneficial holders of such Securities will only be permitted to exercise the rights of Securityholders under the Pooling and Servicing Agreement indirectly through DTC and its Participants who in turn will exercise their rights through DTC. Under the rules, regulations and procedures creating and affecting DTC and its operations, DTC is required to make book-entry transfers among Participants on whose behalf it acts with respect to the Securities and is required to receive and transmit payments of principal of and interest on the Securities. Participants and Indirect Participants with which Securityholders have accounts with respect to their Securities similarly are required to make book-entry transfers and receive and transmit such payments on behalf of their respective Securityholders. Accordingly, although Securityholders will not possess Securities, the rules provide a mechanism by which Securityholders will receive distributions and will be able to transfer their interests. Unless and until Physical Certificates are issued, Securityholders who are not Participants may transfer ownership of Securities only through Participants by instructing such Participants to transfer Securities, by book-entry transfer, through DTC for the account of the purchasers of such Securities, which account is maintained with their respective Participants. Under the Rules and in accordance with DTC's normal procedures, transfers of ownership of Securities will be executed through DTC and the accounts of the respective Participants at DTC will be debited and credited. Similarly, the respective Participants will make debits or credits, as the case may be, on their records on behalf of the selling and purchasing Securityholders. 37 Because DTC can only act on behalf of Participants, who in turn act on behalf of Indirect Participants and certain banks, the ability of a Securityholder to pledge Securities to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such Securities may be limited due to the lack of a Physical Certificate for such Securities. DTC in general advises that it will take any action permitted to be taken by a Securityholder under a Pooling and Servicing Agreement only at the direction of one or more Participants to whose account with DTC the related Securities are credited. Additionally, DTC in general advises that it will take such actions with respect to specified percentages of the Securityholders only at the direction of and on behalf of Participants whose holdings include current principal amounts of outstanding Securities that satisfy such specified percentages. DTC may take conflicting actions with respect to other current principal amounts of outstanding Securities to the extent that such actions are taken on behalf of Participants whose holdings include such current principal amounts of outstanding Securities. Any Securities initially registered in the name of Cede, as nominee of DTC, will be issued in fully registered, certificated form to Securityholders or their nominees ('Physical Certificates'), rather than to DTC or its nominee only under the events specified in the related Pooling and Servicing Agreement and described in the related Prospectus Supplement. Upon the occurrence of any of the events specified in the related Pooling and Servicing Agreement and the Prospectus Supplement, DTC will be required to notify all Participants of the availability through DTC of Physical Certificates. Upon surrender by DTC of the securities representing the Securities and instruction for reregistration, the Trustee will issue the Securities in the form of Physical Certificates, and thereafter the Trustee will recognize the holders of such Physical Certificates as Securityholders. Thereafter, payments of principal of and interest on the Securities will be made by the Trustee directly to Securityholders in accordance with the procedures set forth herein and in the Pooling and Servicing Agreement. The final distribution of any Security (whether Physical Certificates or Securities registered in the name of Cede), however, will be made only upon presentation and surrender of such Securities on the final Payment Date at such office or agency as is specified in the notice of final payment to Securityholders. ASSIGNMENT OF MORTGAGE LOANS At the time of issuance of a series of Securities, the Sponsor will cause the Mortgage Loans being included in the related Trust Estate to be assigned to the Trustee together with, unless otherwise specified in the related Prospectus Supplement, all payments and collections in respect of the Mortgage Loans due, accrued or received, as described in the related Prospectus Supplement on or after the related Cut-Off Date. If specified in the related Prospectus Supplement, the Sponsor or any of its affiliates may retain the Originator's Retained Yield, if any, for itself or transfer the same to others. The Trustee will, concurrently with such assignment, deliver a series of Securities to the Sponsor in exchange for the Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing as an exhibit to the related Pooling and Servicing Agreement. Such schedule will include, among other things, information as to the principal balance of each Mortgage Loan as of the Cut-Off Date, as well as information regarding the Mortgage Rate, the currently scheduled monthly payment of principal and interest and the maturity of the Mortgage Note. In connection with the establishment of certain Trusts the Sponsor may first transfer the related Trust Estate to the Transferor and the Transferor will then transfer such Trust Estate to the related Trust. The use of the Transferor will not affect the obligations of the Sponsor with respect to the related Trust or the related Securities. If the Transferor is to be involved in a particular offering the related Prospectus Supplement will describe its role in such offering; for purposes of this Prospectus the role of the Transferor is subsumed in the role of the Sponsor. The related Prospectus Supplement will describe any applicable requirements relating to the delivery of documents, such as the related Notes, and the preparation and/or filing of transfer documentation, such as assignments of Mortgage, in connection with the establishment of the related Trust. To the extent that the ratings, if any, then assigned to the unsecured debt of the Sponsor or of the Sponsor's ultimate corporate parent are satisfactory to the Rating Agencies, all or any portion of such document delivery requirements and/or transfer document preparation and filing requirements may be waived, all as to be described in the related Prospectus Supplement. 38 A typical provision relating to document delivery requirements would provide that the Sponsor deliver to the Trustee a file consisting of (i) the original Notes or certified copies thereof, endorsed by the Originator thereof in blank or to the order of the holder, (ii) originals of all intervening assignments, showing a complete chain of title from origination to the applicable Originators, if any, including warehousing assignments, with evidence of recording thereon, (iii) originals of all assumption and modification agreements, if any, and, unless such Mortgage Loan is covered by a counsel's opinion as described in the next paragraph, (iv) either: (a) the original Mortgage, with evidence of recording thereon, (b) a true and accurate copy of the Mortgage where the original has been transmitted for recording, until such time as the original is returned by the public recording office or (c) a copy of the Mortgage certified by the public recording office in those instances where the original recorded Mortgage has been lost. To the extent that such a file containing all or a portion of such items has been delivered to the Trustee, the Trustee will generally be required, for the benefit of the Securityholders, to review each such file within a specified period, generally not exceeding 90 days, to ascertain that all required documents (or certified copies of documents) have been executed and received. A typical provision relating to the preparation and filing of transfer documentation would require the Originators to cause to be prepared and recorded, within a specified period, generally not exceeding 75 business days of the execution and delivery of the applicable Pooling and Servicing Agreement (or, if original recording information is unavailable, within such later period as is permitted by the Pooling and Servicing Agreement) assignments of the Mortgages from the Originators to the Trustee, in the appropriate jurisdictions in which such recordation is necessary to perfect the lien thereof as against creditors of or purchasers from the Originators, to the Trustee; provided, however, that if the Originators furnish to the Trustee and to the Certificate Insurer an opinion of counsel to the effect that no such recording is necessary to perfect the Trustee's interests in the Mortgages with respect to any of the jurisdictions in which the related Mortgaged Properties are located, then such recording will not be required with respect to such jurisdictions or at the election of the Certificate Insurer, any jurisdiction. Unless otherwise specified in the related Prospectus Supplement, if any such document is found to be missing or defective in any material respect, the Trustee (or such custodian) shall promptly so notify the Sponsor, which shall notify the related Sub-Servicer or Originator, as the case may be. If the Sub-Servicer or Originator does not cure the omission or defect within a specified period, generally not exceeding 60 days after notice is given to the Sponsor, the Sub-Servicer or Originator, as the case may be, will be obligated to purchase on the next succeeding Remittance Date the related Mortgage Loan from the Trustee at its Loan Purchase Price (or, if specified in the related Prospectus Supplement, will be permitted to substitute for such Mortgage Loan under the conditions specified in the related Prospectus Supplement). The Master Servicer will be obligated to enforce this obligation of the Sub-Servicer or Originator, as the case may be, to the extent described above under 'Mortgage Loan Program--Representations by Originators.' Unless otherwise specified in the related Prospectus Supplement, neither the Master Servicer nor the Sponsor will, however, be obligated to purchase or substitute for such Mortgage Loan if the Sub-Servicer or Originator, as the case may be, defaults on its obligation to do so, and there can be no assurance that a Sub-Servicer or Originator, as the case may be, will carry out any such obligation. Unless otherwise specified in the related Prospectus Supplement, such purchase obligation constitutes the sole remedy available to the Securityholders or the Trustee for omission of, or a material defect in, a constituent document. The Trustee will be authorized at any time to appoint a custodian pursuant to a custodial agreement to maintain possession of and, if applicable, to review the documents relating to the Mortgage Loans as the agent of the Trustee. The identity of any such custodian to be appointed on the date of initial issuance of the Securities will be set forth in the related Prospectus Supplement. Pursuant to each Pooling and Servicing Agreement, the Master Servicer, either directly or through Sub-Servicers, will service and administer the Mortgage Loans assigned to the Trustee as more fully set forth below. FORWARD COMMITMENTS; PRE-FUNDING A Trust may enter into an agreement (each, a 'Forward Purchase Agreement') with the Sponsor whereby the Sponsor will agree to transfer additional Mortgage Loans to such Trust following the date on which such Trust is established and the related Securities are issued. The Trust may enter into Forward Purchase Agreements to permit the acquisition of additional Mortgage Loans (the 'Subsequent Mortgage Loans') that could not be 39 delivered by the Sponsor or have not formally completed the origination process, in each case prior to the date on which the Securities are delivered to the Securityholders (the 'Closing Date'). Any Forward Purchase Agreement will require that any Mortgage Loans so transferred to a Trust conform to the requirements specified in such Forward Purchase Agreement. In addition, the Forward Purchase Agreement states that the Depositor shall only transfer the Subsequent Mortgage Loans upon the satisfaction of certain conditions including that the Depositor shall have delivered to the Certificate Insurer, the Rating Agencies and the Trustee opinions of counsel (including bankruptcy, corporate and tax opinions) with respect to the transfer of the Subsequent Mortgage Loans. If a Forward Purchase Agreement is to be utilized, and unless otherwise specified in the related Prospectus Supplement, the related Trustee will be required to deposit in a segregated account (each, a 'Pre-Funding Account') up to 100% of the net proceeds received by the Trustee in connection with the sale of one or more classes of Securities of the related series; the additional Mortgage Loans will be transferred to the related Trust in exchange for money released to the Sponsor from the related Pre-Funding Account. Each Forward Purchase Agreement will set a specified period (the 'Funding Period') during which any such transfers must occur; for a Trust which elects federal income treatment as a REMIC or as a grantor trust, the related Funding Period will be limited to three months from the date such Trust is established; for a Trust which is treated as a mere security device for federal income tax purposes, the related Funding Period will be limited to nine months from the date such Trust is established. The Forward Purchase Agreement or the related Pooling and Servicing Agreement will require that, if all moneys originally deposited to such Pre-Funding Account are not so used by the end of the related Funding Period, then any remaining moneys will be applied as a mandatory prepayment of the related class or classes of Securities as specified in the related Prospectus Supplement. During the Funding Period, the moneys deposited to the Pre-Funding Account will either (i) be held uninvested or (ii) will be invested in cash-equivalent investments that are rated in one of the four highest rating categories by at least one nationally recognized statistical rating organization and that will either mature prior to the end of the Funding Period, or will be drawable on demand and in any event, will not constitute the type of investment that would require registration of the related Trust as an 'investment company' under the Investment Company Act of 1940, as amended. On payment dates that occur during the Funding Period, the Trustee will transfer any earnings on the moneys in the Pre-Funding Account to the Certificate Account for distribution to the Certificateholders. The Pre-Funding Account will be maintained by the Trustee, which must be a bank having combined capital and surplus, generally, of a least $100,000,000, long-term, unsecured debt rated at least investment grade and a long-term deposit rating of at least investment grade. PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO DISTRIBUTION ACCOUNT Each Sub-Servicer servicing a Mortgage Loan pursuant to a Sub-Servicing Agreement will establish and maintain an account (the 'Sub-Servicing Account') which generally meets the requirements set forth in the Sponsor's Originator Guide from time to time, and is otherwise acceptable to the Master Servicer. A Sub-Servicing Account must be established with a Federal Home Loan Bank or with a depository institution (including the Sub-Servicer itself) whose accounts are insured by the National Credit Union Share Insurance Fund or the FDIC, provided that any such depository institution must meet certain minimum rating criteria set forth in the Sponsor's Originator Guide. Except as otherwise permitted by the applicable Rating Agencies, a Sub-Servicing Account must be segregated and may not be established as a general ledger account. A Sub-Servicer is required to deposit into its Sub-Servicing Account on a daily basis all amounts described above under 'Mortgage Loan Program--Sub- Servicing by Originators' that are received by it in respect of the Mortgage Loans, less its servicing or other compensation. On or before the date specified in the Sub-Servicing Agreement (which date may be no later than the business day prior to the Determination Date referred to below or, if such day is not a business day, the preceding business day), the Sub-Servicer must remit or cause to be remitted to the Master Servicer all funds held in the Sub-Servicing Account with respect to Mortgage Loans that are required to be so remitted. A Sub-Servicer may also be required to make such Servicing Advances and Delinquency Advances and to pay Compensating Interest as set forth in the related Sub-Servicing Agreement. The Master Servicer will deposit or will cause to be deposited into the Principal and Interest Account on a daily basis certain payments and collections due, accrued or received, as described in the related Prospectus 40 Supplement on or after to the Cut-Off Date, as specifically set forth in the related Pooling and Servicing Agreement, such as the following except as otherwise provided therein: (i) all payments on account of principal, including principal payments received in advance of the date on which the related monthly payment is due (the 'Due Date') ('Principal Prepayments'), on the Mortgage Loans comprising a Trust Estate; (ii) all payments on account of interest on the Mortgage Loans comprising such Trust Estate, net of the portion of each payment thereof retained by the Sub-Servicer, if any, as its servicing or other compensation; (iii) all amounts (net of unreimbursed liquidation expenses and insured expenses incurred, and unreimbursed advances made, by the related Sub-Servicer) received and retained, if any, in connection with the liquidation of any defaulted Mortgage Loan, by foreclosure, deed in lieu of foreclosure or otherwise ('Liquidation Proceeds'), including all proceeds of any special hazard insurance policy, bankruptcy bond, mortgage pool insurance policy, financial guaranty insurance policy and any title, hazard or other insurance policy covering any Mortgage Loan in such Mortgage Pool (together with any payments under any letter of credit, 'Insurance Proceeds') or proceeds from any alternative arrangements established in lieu of any such insurance and described in the applicable Prospectus Supplement, other than proceeds to be applied to the restoration of the related property or released to the Mortgagor in accordance with the Master Servicer's normal servicing procedures (such amounts, net of related unreimbursed expenses and advances of the Master Servicer, 'Net Liquidation Proceeds'); (iv) any Buydown Funds (and, if applicable, investment earnings thereon) required to be paid to Securityholders, as described below; (v) all proceeds of any Mortgage Loan in such Trust Estate purchased (or, in the case of a substitution, certain amounts representing a principal adjustment) by the Master Servicer, the Sponsor, any Sub-Servicer or Originator or any other person pursuant to the terms of the Pooling and Servicing Agreement. See 'Mortgage Loan Program--Representations by Originators,' '--Assignment of Mortgage Loans' above; (vi) any amounts required to be deposited by the Master Servicer in connection with losses realized on investments of funds held in the Principal and Interest Account, as described below; (vii) any amounts required to be deposited in connection with the liquidation of the related Trust; and (viii) any amounts required to be transferred from the Distribution Account to the Principal and Interest Account. In addition to the Principal and Interest Account, the Sponsor shall cause to be established and the Trustee will maintain, at the corporate trust office of the Trustee, in the name of the Trust for the benefit of the holders of each series of Securities, an account for the disbursement of payments on the Mortgage Loans evidenced by each series of Securities (the 'Distribution Account'). The Principal and Interest Account and the Distribution Account each must be maintained with a Designated Depository Institution. A 'Designated Depository Institution' is an institution whose deposits are insured by the Bank Insurance Fund or the Savings Association Insurance Fund of the FDIC, the long-term deposits of which have a rating satisfactory to the Rating Agencies and the related Credit Enhancer, if any, and which is any of the following: (i) a federal savings and loan association duly organized, validly existing and in good standing under the federal banking laws, (ii) an institution duly organized, validly existing and in good standing under the applicable banking laws of any state, (iii) a national banking association duly organized, validly existing and in good standing under the federal banking laws, (iv) a principal subsidiary of a bank holding company, or (v) approved in writing by the related Credit Enhancer, if any, each Rating Agency and, in each case acting or designated by the Master Servicer as the depository institution for the Principal and Interest Account; provided, however, that any such institution or association will generally be required to have combined capital, surplus and undivided profits of at least $100,000,000. Notwithstanding the foregoing, the Principal and Interest Account may be held by an institution otherwise meeting the preceding requirements except that the only applicable rating requirement shall be that the unsecured and uncollateralized debt obligations thereof shall be rated at a level satisfactory to one or more Rating Agencies if such institution has trust powers and the Principal and Interest Account is held by such institution in its trust capacity and not in its commercial capacity. The Distribution Account, the Principal and Interest Account and other accounts described in the related Prospectus Supplement are collectively referred to as 'Accounts.' All funds in the Distribution Account shall be invested and reinvested by the Trustee for the benefit of the 41 Securityholders and the related Credit Enhancer, if any, as directed by the Master Servicer, in certain defined obligations set forth in the related Pooling and Servicing Agreement ('Eligible Investments'). The Principal and Interest Account may contain funds relating to more than one series of Securities as well as payments received on other mortgage loans serviced or master serviced by it that have been deposited into the Principal and Interest Account. All funds in the Principal and Interest Account will be required to be held (i) uninvested, up to limits insured by the FDIC or (ii) invested in Eligible Investments. The Master Servicer will be entitled to any interest or other income or gain realized with respect to the funds on deposit in the Principal and Interest Account. To the extent that the ratings, if any, then assigned to the unsecured debt of the Master Servicer or of the Master Servicer's corporate parent and satisfactory to the Rating Agencies, the Master Servicer may be permitted to co-mingle Mortgage Loan payments and collections with the Master Servicer's general funds rather than required to deposit such amounts into a segregated Principal and Interest Account. Unless otherwise specified in the related Prospectus Supplement, on the day seven days preceding each Payment Date (the 'Remittance Date'), the Master Servicer will withdraw from the Principal and Interest Account and remit to the Trustee for deposit in the applicable Distribution Account, in immediately available funds, the amount to be distributed therefrom to Securityholders on such Payment Date. The Master Servicer will remit to the Trustee for deposit into the Distribution Account the amount of any advances made by the Master Servicer as described herein under '--Advances,' any amounts required to be transferred to the Distribution Account from a Reserve Fund, as described under 'Credit Enhancement' below, any amounts required to be paid by the Master Servicer out of its own funds due to the operation of a deductible clause in any blanket policy maintained by the Master Servicer to cover hazard losses on the Mortgage Loans as described under 'Hazard Insurance; Claims Thereunder--Hazard Insurance Policies' below and any other amounts as specifically set forth in the related Pooling and Servicing Agreement. The Trustee will cause all payments received by it from any Credit Enhancer to be deposited in the Distribution Account not later than the related Payment Date. Unless otherwise specified in the related Prospectus Supplement, the portion of any payment received by the Master Servicer in respect of a Mortgage Loan that is allocable to the Originator's Retained Yield generally will not be deposited into the Principal and Interest Account, but will not be paid over to the parties entitled thereto as provided in the related Pooling and Servicing Agreement. Funds on deposit in the Principal and Interest Account attributable to Mortgage Loans underlying a series of Securities may be invested in Eligible Investments maturing in general not later than the business day preceding the next Payment Date. Unless otherwise specified in the related Prospectus Supplement, all income and gain realized from any such investment will be for the account of the Master Servicer. Funds on deposit in the related Distribution Account may be invested in Eligible Investments maturing, in general, no later than the business day preceding the next Payment Date. With respect to each Buydown Mortgage Loan, the Sub-Servicer will deposit the related Buydown Funds provided to it in a Buydown Account that will comply with the requirements set forth herein with respect to a Sub-Servicing Account. Unless otherwise specified in the related Prospectus Supplement, the terms of all Buydown Mortgage Loans provide for the contribution of Buydown Funds in an amount equal to or exceeding either (i) the total payments to be made from such funds pursuant to the related buydown plan or (ii) if such Buydown Funds are to be deposited on a discounted basis, that amount of Buydown Funds which, together with investment earnings thereon at a rate as set forth in the Sponsor's Originator Guide from time to time, will support the scheduled level of payments due under the Buydown Mortgage Loan. Neither the Master Servicer nor the Sponsor will be obligated to add to any such discounted Buydown Funds any of its own funds should investment earnings prove insufficient to maintain the scheduled level of payments. To the extent that any such insufficiency is not recoverable from the Mortgagor or, in an appropriate case, from the related Originator or the related Sub-Servicer, distributions to Securityholders may be affected. With respect to each Buydown Mortgage Loan, the Sub-Servicer will withdraw from the Buydown Account and remit to the Master Servicer on or before the date specified in the Sub-Servicing Agreement described above the amount, if any, of the Buydown Funds (and, if applicable, investment earnings thereon) for each Buydown Mortgage Loan that, when added to the amount due from the Mortgagor on such Buydown Mortgage Loan, equals the full monthly payment which would be due on the Buydown Mortgage Loan if it were not subject to the buydown plan. If the Mortgagor on a Buydown Mortgage Loan prepays such Mortgage Loan in its entirety during the Buydown Period, the Sub-Servicer will withdraw from the Buydown Account and remit to the Mortgagor or such 42 other designated party in accordance with the related buydown plan any Buydown Funds remaining in the Buydown Account. If a prepayment by a Mortgagor during the Buydown Period together with Buydown Funds will result in full prepayment of a Buydown Mortgage Loan, the Sub-Servicer will generally be required to withdraw from the Buydown Account and remit to the Master Servicer the Buydown Funds and investment earnings thereon, if any, which together with such prepayment will result in a prepayment in full; provided that Buydown Funds may not be available to cover a prepayment under certain Mortgage Loan programs. Any Buydown Funds so remitted to the Master Servicer in connection with a prepayment described in the preceding sentence will be deemed to reduce the amount that would be required to be paid by the Mortgagor to repay fully the related Mortgage Loan if the Mortgage Loan were not subject to the buydown plan. Any investment earnings remaining in the Buydown Account after prepayment or after termination of the Buydown Period will be remitted to the related Mortgagor or such other designated party pursuant to the agreement relating to each Buydown Mortgage Loan (the 'Buydown Agreement'). If the Mortgagor defaults during the Buydown Period with respect to a Buydown Mortgage Loan and the property securing such Buydown Mortgage Loan is sold in liquidation (either by the Master Servicer, the Primary Insurer, the insurer under the mortgage pool insurance policy (the 'Pool Insurer') or any other insurer), the Sub-Servicer will be required to withdraw from the Buydown Account the Buydown Funds and all investment earnings thereon, if any, and remit the same to the Master Servicer or, if instructed by the Master Servicer, pay the same to the primary insurer or the Pool Insurer, as the case may be, if the Mortgaged Property is transferred to such insurer and such insurer pays all of the loss incurred in respect of such default. WITHDRAWALS FROM THE PRINCIPAL AND INTEREST ACCOUNT The Master Servicer may, from time to time, make withdrawals from the Principal and Interest Account for certain purposes, as specifically set forth in the related Pooling and Servicing Agreement, which generally will include the following except as otherwise provided therein: (i) to effect the timely remittance to the Trustee for deposit to the Distribution Account in the amounts and in the manner provided in the Pooling and Servicing Agreement and described in '--Payments on Mortgage Loans; Deposits to Distribution Account' above; (ii) to reimburse itself or any Sub-Servicer for Delinquency Advances and Servicing Advances as to any Mortgaged Property, out of late payments or collections on the related Mortgage Loan with respect to which such Delinquency Advances or Servicing Advances were made; (iii) to withdraw investment earnings on amounts on deposit in the Principal and Interest Account; (iv) to pay the Sponsor or its assignee all amounts allocable to the Originator's Retained Yield out of collections or payments which represent interest on each Mortgage Loan (including any Mortgage Loan as to which title to the underlying Mortgaged Property was acquired); (v) to withdraw amounts that have been deposited in the Principal and Interest Account in error; (vi) to clear and terminate the Principal and Interest Account in connection with the termination of the Trust Estate pursuant to the Pooling and Servicing Agreement, as described in 'The Pooling and Servicing Agreement--Termination, Retirement of Securities'; and (vii) to invest in Eligible Investments. DISTRIBUTIONS Beginning on the Payment Date in the month following the month (or, in the case of quarterly-pay Securities, the third month following such month and each third month thereafter or, in the case of semi-annually-pay Securities, the sixth month following such month and each sixth month thereafter) in which the Cut-Off Date occurs (or such other date as may be set forth in the related Prospectus Supplement) for a series of Securities, distributions of principal and interest (or, where applicable, of principal only or interest only) on each class of Securities entitled thereto will be made either by the Trustee or a paying agent appointed by the Trustee (the 'Paying Agent'), to the persons who are registered as Securityholders at the close of business on the Record Date in proportion to their respective Percentage Interests. Unless otherwise specified in the related Prospectus Supplement, interest that accrues and is not payable on a class of Securities will be added to the principal balance of each Security of such class in proportion to its Percentage Interest. The undivided percentage interest (the 'Percentage Interest') represented by a Security of a particular class will be equal to the percentage obtained by 43 dividing the initial principal balance or notional amount of such Security by the aggregate initial amount or notional balance of all the Securities of such class. Distributions will be made in immediately available funds (by wire transfer or otherwise) to the account of a Securityholder at a bank or other entity having appropriate facilities therefor, if such Securityholder has so notified the Trustee or the Paying Agent, as the case may be, and the applicable Pooling and Servicing Agreement provides for such form of payment, or by check mailed to the address of the person entitled thereto as it appears on the Security Register; provided, however, that the final distribution in retirement of the Securities (other than any Book-Entry Securities) will be made only upon presentation and surrender of the Securities at the office or agency of the Trustee specified in the notice to Securityholders of such final distribution. PRINCIPAL AND INTEREST ON THE SECURITIES The method of determining, and the amount of, distributions of principal and interest (or, where applicable, of principal only or interest only) on a particular series of Securities will be described in the related Prospectus Supplement. Each class of Securities (other than certain classes of Strip Securities) may bear interest at a different interest rate (the 'Pass-Through Rate'), which may be a fixed or adjustable Pass-Through Rate. The related Prospectus Supplement will specify the Pass-Through Rate for each class, or in the case of an adjustable Pass-Through Rate, the initial Pass-Through Rate and the method for determining the Pass-Through Rate. Unless otherwise specified in the related Prospectus Supplement, interest on the Securities will be calculated on the basis of a 360-day year consisting of twelve 30-day months. On each Payment Date for a series of Securities, the Trustee will distribute or cause the Paying Agent to distribute, as the case may be, to each holder of record on the Record Date of a class of Securities, an amount equal to the Percentage Interest represented by the Security held by such holder multiplied by such class' Distribution Amount. The Distribution Amount for a class of Securities for any Payment Date will be the portion, if any, of the principal distribution amount (as defined in the related Prospectus Supplement) allocable to such class for such Payment Date, as described in the related Prospectus Supplement, plus, if such class is entitled to payments of interest on such Payment Date, the interest accrued at the applicable Pass-Through Rate on the principal balance or notional amount of such class, as specified in the applicable Prospectus Supplement, less (unless otherwise specified in the Prospectus Supplement) the amount of any Deferred Interest added to the principal balance of the Mortgage Loans and/or the outstanding balance of one or more classes of Securities on the related Due Date and any other interest shortfalls allocable to Securityholders which are not covered by advances or the applicable Credit Enhancement, in each case in such amount that is allocated to such class on the basis set forth in the Prospectus Supplement. As may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of the principal collected on or with respect to the related Mortgage Loans may be applied by the related Trustee to the acquisition of additional Mortgage Loans during a specified period (rather than used to fund payments of principal to Securityholders during such period) with the result that the related securities will possess an interest-only period, also commonly referred to as a revolving period, which will be followed by an amortization period. Any such interest-only or revolving period may, upon the occurrence of certain events to be described in the related Prospectus Supplement, terminate prior to the end of the specified period and result in the earlier than expected amortization of the related Securities. In addition, and as may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of such collected principal may be retained by the Trustee (and held in certain temporary investments, including Mortgage Loans) for a specified period prior to being used to fund payments of principal to Securityholders. In the case of a series of Securities that includes two or more classes of Securities, the timing, sequential order, priority of payment or amount of distributions in respect of principal, and any schedule or formula or other provisions applicable to the determination thereof (including distributions among multiple classes of Senior Securities or Subordinate Securities) of each such class shall be as provided in the related Prospectus Supplement. Distributions in respect of principal of any class of Securities will be made on a pro rata basis among all of the Securities of such class. Except as otherwise provided in the related Pooling and Servicing Agreement, on or prior to the third business day next preceding the Payment Date (or such earlier day as shall be agreed by the related Credit 44 Enhancer, if any, and the Trustee) of the month of distribution (the 'Determination Date'), the Trustee will determine the amounts of principal and interest which will be passed through to Securityholders on the immediately succeeding Payment Date. If the amount in the Distribution Account is insufficient to cover the amount to be passed through to Securityholders, the Trustee will be required to notify the related Credit Enhancer, if any, pursuant to the related Pooling and Servicing Agreement for the purpose of funding such deficiency. ADVANCES Unless otherwise specified in the related Prospectus Supplement, each Servicer will be required, not later than each Remittance Date, to deposit into the Principal and Interest Account an amount equal to the sum of the interest portions (net of the Servicing Fees and the Originators' Retained Yield) due, but not collected, with respect to delinquent Mortgage Loans directly serviced by such Servicer during the prior Remittance Period, but only if, in its good faith business judgment, such Servicer believes that such amount will ultimately be recovered from the related Mortgage Loan. As may be described in the related Prospectus Supplement, such Servicer may also be required so to advance delinquent payments of principal. Any such amounts so advanced are 'Delinquency Advances'. The Master Servicer will be permitted to fund its payment of Delinquency Advances on any Remittance Date from collections on any Mortgage Loan deposited to the Principal and Interest Account subsequent to the related Remittance Period, and will be required to deposit into the Principal and Interest Account with respect thereto (i) collections from the Mortgagor whose delinquency gave rise to the shortfall which resulted in such Delinquency Advance and (ii) Net Liquidation Proceeds recovered on account of the related Mortgage Loan to the extent of the amount of aggregate Delinquency Advances related thereto. A Sub-Servicer will be permitted to fund its payment of Delinquency Advances as set forth in the related Sub-Servicing Agreement. A Mortgage Loan is 'delinquent' if any payment due thereon is not made by the close of business on the day such payment is scheduled to be due. Unless otherwise specified in the related Prospectus Supplement, on or prior to each Remittance Date, each Servicer will be required to deposit in the Principal and Interest Account with respect to any full prepayment received on a Mortgage Loan directly serviced by such Servicer during the related Remittance Period out of its own funds without any right of reimbursement therefor, an amount equal to the difference between (x) 30 days' interest at the Mortgage Loan's Mortgage Rate (less the related Base Servicing Fees and the Originators' Retained Yield, if any) on the principal balance of such Mortgage Loan as of the first day of the related Remittance Period and (y) to the extent not previously advanced, the interest (less the Servicing Fee and the Originators' Retained Yield, if any) paid by the Mortgagor with respect to the Mortgage Loan during such Remittance Period (any such amount paid by such Servicer, 'Compensating Interest'). No Servicer shall be required to pay Compensating Interest with respect to any Remittance Period in an amount in excess of the aggregate related Base Servicing Fees received by such Servicer with respect to all Mortgage Loans directly serviced by such Servicer for such Remittance Period. Each Servicer will be required to pay all 'out of pocket' costs and expenses incurred in the performance of its servicing obligations, but only to the extent that such Servicer reasonably believes that such amounts will increase Net Liquidation Proceeds on the related Mortgage Loan. Each such amount so paid will constitute a 'Servicing Advance'. Such Servicer may recover Servicing Advances to the extent permitted by the Mortgage Loans or, if not theretofore recovered from the Mortgagor on whose behalf such Servicing Advance was made, from Liquidation Proceeds realized upon the liquidation of the related Mortgage Loan or, in certain cases, from excess cash flow otherwise payable to the holders of the related Equity Securities. Notwithstanding the foregoing, if the Master Servicer exercises its option, if any, to purchase the assets of a Trust Estate as described under 'The Pooling and Servicing Agreement--Termination; Retirement of Securities' below, the Master Servicer will be deemed to have been reimbursed for all related advances previously made by it and not theretofore reimbursed to it. The Master Servicer's obligation to make advances may be supported by Credit Enhancement as described in the related Pooling and Servicing Agreement. In the event that the provider of such support is downgraded by a Rating Agency rating the related Securities or if the collateral supporting such obligation is not performing or is removed pursuant to the terms of any agreement described in the related Prospectus Supplement, the Securities may also be downgraded. 45 REPORTS TO SECURITYHOLDERS With each distribution to Securityholders of a particular class the Trustee will forward or cause to be forwarded to each holder of record of such class of Securities a statement or statements with respect to the related Trust setting forth the information specifically described in the related Pooling and Servicing Agreement, which generally will include the following as applicable except as otherwise provided therein: (i) the amount of the distribution with respect to each class of Securities; (ii) the amount of such distribution allocable to principal, separately identifying the aggregate amount of any prepayments or other recoveries of principal included therein; (iii) the amount of such distribution allocable to interest; (iv) the aggregate unpaid Principal Balance of the Mortgage Loans after giving effect to the distribution of principal on such Payment Date; (v) with respect to a series consisting of two or more classes, the outstanding principal balance or notional amount of each class after giving effect to the distribution of principal on such Payment Date; (vi) the amount of coverage under any letter of credit, mortgage pool insurance policy or other form of Credit Enhancement covering default risk as of the close of business on the applicable Determination Date and a description of any Credit Enhancement substituted therefor; (vii) information furnished by the Sponsor pursuant to section 6049(d)(7)(C) of the Code and the regulations promulgated thereunder to assist Securityholders in computing their market discount; (viii) the total of any Substitution Amounts and any Loan Purchase Price amounts included in such distribution; and (ix) a number with respect to each class (the 'Pool Factor') computed by dividing the principal balance of all Securities in such class (after giving effect to any distribution of principal to be made on such Payment Date) by the original principal balance of the Securities of such class on the Closing Date. Items (i) through (iii) above shall, with respect to each class of Securities, be presented on the basis of a certificate having a $1,000 denomination. In addition, by January 31 of each calendar year during which Securities are outstanding, the Trustee shall furnish a report to each Securityholder at any time during each calendar year as to the aggregate amounts reported pursuant to (i), (ii) and (iii) with respect to the Securities for such calendar year. If a class of Securities are in book-entry form, DTC will supply such reports to the Securityholders in accordance with its procedures. In addition, on each Payment Date the Trustee will forward or cause to be forwarded additional information, as of the close of business on the last day of the prior calendar month, as more specifically described in the related Pooling and Servicing Agreement, which generally will include the following as applicable except as otherwise provided therein: (i) the total number of Mortgage Loans and the aggregate principal balances thereof, together with the number, percentage (based on the then-outstanding principal balances) and aggregate principal balances of Mortgage Loans (a) 30-59 days delinquent, (b) 60-89 days delinquent and (c) 90 or more days delinquent; (ii) the number, percentage (based on the then-outstanding principal balances), aggregate Mortgage Loan balances and status of all Mortgage Loans in foreclosure proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); (iii) the number, percentage (based on the then-outstanding principal balances) and aggregate Mortgage Loan balances of all Mortgage Loans relating to Mortgagors in bankruptcy proceedings (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); (iv) the number, percentage (based on the then-outstanding principal balances) and aggregate Mortgage Loan balances of all Mortgage Loans relating to the status of any Mortgaged Properties as to which title has been taken in the name of, or on behalf of the Trustee (and whether any such Mortgage Loans are also included in any of the statistics described in the foregoing clause (i)); and (v) the book value of any real estate acquired through foreclosure or grant of a deed in lieu of foreclosure. 46 COLLECTION AND OTHER SERVICING PROCEDURES Acting directly or through one or more Sub-Servicers as provided in the related Pooling and Servicing Agreement, the Master Servicer, is required to service and administer the Mortgage Loans in accordance with the Pooling and Servicing Agreement and with reasonable care, and using that degree of skill and attention that the Master Servicer exercises with respect to comparable mortgage loans that it services for itself or others. The duties of the Master Servicer include collecting and posting of all payments, responding to inquiries of Mortgagors or by federal, state or local government authorities with respect to the Mortgage Loans, investigating delinquencies, reporting tax information to Mortgagors in accordance with its customary practices and accounting for collections and furnishing monthly and annual statements to the Trustee with respect to distributions and making Delinquency Advances and Servicing Advances to the extent described in the related Prospectus Supplement. The Master Servicer is required to follow its customary standards, policies and procedures in performing its duties as Master Servicer. The Master Servicer (i) is authorized and empowered to execute and deliver, on behalf of itself, the Securityholders and the Trustee or any of them, any and all instruments of satisfaction or cancellation, or of partial or full release or discharge and all other comparable instruments, with respect to the Mortgage Loans and with respect to the related Mortgaged Properties; (ii) may consent to any modification of the terms of any Note not expressly prohibited by the Pooling and Servicing Agreement if the ef fect of any such modification (x) will not materially and adversely affect the security afforded by the related Mortgaged Property or the timing of receipt of any payments required thereunder (in each case other than as permitted by the related Pooling and Servicing Agreement); and (y) will not cause a Trust which is a REMIC to fail to qualify as a REMIC. The related Pooling and Servicing Agreement will require the Master Servicer to follow such collection procedures as it follows from time to time with respect to mortgage loans in its servicing portfolio that are comparable to the Mortgage Loans; provided that the Master Servicer is required always at least to follow collection procedures that are consistent with or better than standard industry practices. The Master Servicer may in its discretion (i) waive any assumption fees, late payment charges, charges for checks returned for insufficient funds, prepayment fees, if any, or the fees which may be collected in the ordinary course of servicing the Mortgage Loans, (ii) if a Mortgagor is in default or about to be in default because of a Mortgagor's financial condition, arrange with the Mortgagor a schedule for the payment of delinquent payments due on the related Mortgage Loan; provided, however, the Master Servicer shall generally not be permitted to reschedule the payment of delinquent payments more than one time in any twelve consecutive months with respect to any Mortgagor or (iii) modify payments of monthly principal and interest on any Mortgage Loan becoming subject to the terms of the Relief Act in accordance with the Master Servicer's general policies of the comparable mortgage loans subject to such Relief Act. When a Mortgaged Property (other than Mortgaged Property subject to an ARM Loan) has been or is about to be conveyed by the Mortgagor, the Master Servicer will be required, to the extent it has knowledge of such conveyance or prospective conveyance, to exercise its rights to accelerate the maturity of the related Mortgage Loan under any 'due-on-sale' clause contained in the related Mortgage or Note; provided, however, that the Master Servicer will not be required to exercise any such right if (i) the 'due-on-sale' clause, in the reasonable belief of the Master Servicer, is not enforceable under applicable law or (ii) the Master Servicer reasonably believes that to permit an assumption of the Mortgage Loan would not materially and adversely affect the interests of Securityholders or the related Credit Enhancer or jeopardize coverage under any primary insurance policy or applicable Credit Enhancement arrangements. In such event, the Master Servicer will be required to enter into an assumption and modification agreement with the person to whom such Mortgaged Property has been or is about to be conveyed, pursuant to which such person becomes liable under the Mortgage Note and, unless prohibited by applicable law or the related documents, the Mortgagor remains liable thereon. If the foregoing is not permitted under applicable law, the Master Servicer will be authorized to enter into a substitution of liability agreement with such person, pursuant to which the original Mortgagor is released from liability and such person is substituted as Mortgagor and becomes liable under the Mortgage Note. The assumed loan must conform in all respects to the requirements, representations and warranties of the Pooling and Servicing Agreement. An ARM Loan may be assumed if such ARM Loan is by its terms assumable and if, in the reasonable judgment of the Master Servicer or the Sub-Servicer, the proposed transferee of the related Mortgaged Property establishes its ability to repay the loan and the security for such ARM Loan would not be impaired by the assumption. If a Mortgagor transfers the Mortgaged Property subject to an ARM Loan without consent, such ARM Loan may be 47 declared due and payable. Any fee collected by the Master Servicer or Sub-Servicer for entering into an assumption or substitution of liability agreement will be retained by the Master Servicer or Sub-Servicer as additional servicing compensation unless otherwise set forth in the related Prospectus Supplement. See 'Certain Legal Aspects of Mortgage Loans and Related Matters--Enforceability of Certain Provisions' herein. The Master Servicer will have the right under the Pooling and Servicing Agreement to approve applications of Mortgagors seeking consent for (i) partial releases of Mortgages, (ii) alterations and (iii) removal, demolition or division of Mortgaged Properties. No application for consent may be approved by the Master Servicer unless: (i) the provisions of the related Mortgage Note and Mortgage have been complied with; (ii) the credit profile of the related Mortgage Loan after any release is consistent with the Sponsor's Originator Guide then applicable to such Mortgage Loan; and (iii) the lien priority of the related Mortgage is not reduced. REALIZATION UPON DEFAULTED MORTGAGE LOANS The Master Servicer shall foreclose upon or otherwise comparably effect the ownership of Mortgaged Properties relating to defaulted Mortgage Loans as to which no satisfactory arrangements can be made for collection of delinquent payments and which the Master Servicer has not purchased pursuant to the related Pooling and Servicing Agreement (such Mortgage Loans, 'REO Property'). In connection with such foreclosure or other conversion, the Master Servicer shall exercise such of the rights and powers vested in it, and use the same degree of care and skill in their exercise or use, as prudent mortgage lenders would exercise or use under the circumstances in the conduct of their own affairs, including, but not limited to, making Servicing Advances for the payment of taxes, amounts due with respect to Senior Liens, and insurance premiums. Unless otherwise provided in the related Prospectus Supplement, the Master Servicer shall sell any REO Property within 23 months of its acquisition by the Trust. The Pooling and Servicing Agreements generally will permit the Master Servicer to cease further collection and foreclosure activity if the Master Servicer reasonably determines that such further activity would not increase collections or recoveries to be received by the related Trust with respect to the related Mortgage Loan. In addition, any required advancing may be permitted to cease at this point. Notwithstanding the generality of the foregoing provisions, the Master Servicer will be required to manage, conserve, protect and operate each REO Property for the Securityholders solely for the purpose of its prompt disposition and sale as 'foreclosure property' within the meaning of Section 860G(a)(8) of the Code or result in the receipt by the Trust of any 'income from non-permitted assets' within the meaning of Section 860F(a)(2)(B) of the Code or any 'net income from foreclosure property' which is subject to taxation under the REMIC Provisions. Pursuant to its efforts to sell such REO Property, the Master Servicer shall either itself or through an agent selected by the Master Servicer protect and conserve such REO Property in the same manner and to such extent as is customary in the locality where such REO Property is located and may, incident to its conservation and protection of the interests of the Securityholders, rent the same, or any part thereof, as the Master Servicer deems to be in the best interest of the Securityholders for the period prior to the sale of such REO Property. The Master Servicer shall take into account the existence of any hazardous substances, hazardous wastes or solid wastes, as such terms are defined in the Comprehensive Environmental Response Compensation and Liability Act, the Resource Conservation and Recovery Act of 1976, or other federal, state or local environmental legislation, on a Mortgaged Property in determining whether to foreclose upon or otherwise comparably convert the ownership of such Mortgaged Property. The Master Servicer shall determine, with respect to each defaulted Mortgage Loan, when it has recovered, whether through trustee's sale, foreclosure sale or otherwise, all amounts it expects to recover from or on account of such defaulted Mortgage Loan, whereupon such Mortgage Loan shall become a Liquidated Mortgage Loan. A Mortgage Loan which is 'charged-off', i.e., as to which the Master Servicer ceases further collection and/or foreclosure activity as a result of a determination that such further actions will not increase collections or recoveries to be received by the related Trust is also a 'Liquidated Mortgage Loan.' If a loss is realized on a defaulted Mortgage Loan or REO Property upon the final liquidation thereof that is not covered by any applicable form of Credit Enhancement or other insurance, the Securityholders will bear such loss. However, if a gain results from the final liquidation of an REO Property that is not required by law to be remitted to the related Mortgagor, the Master Servicer will be entitled to retain such gain as additional servicing compensation unless the related Prospectus Supplement provides otherwise. For a description of the Master Servicer's obligations to maintain and make claims under applicable forms of Credit Enhancement and insurance relating to the Mortgage Loans, see 'Description of Credit Enhancement' and 'Hazard Insurance; Claims Thereunder; Hazard Insurance Policies.' 48 SUBORDINATION A Senior/Subordinate Series of Securities will consist of one or more classes of Senior Securities and one or more classes of Subordinate Securities, as specified in the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, only the Senior Securities will be offered hereby. Subordination of the Subordinate Securities of any Senior/Subordinate Series of Securities will be effected by the following method, unless an alternative method is specified in the related Prospectus Supplement. In addition, certain classes of Senior (or Subordinate) Securities may be senior to other classes of Senior (or Subordinate) Securities, as specified in the related Prospectus Supplement, in which case the following discussion is qualified in its entirety by reference to the related Prospectus Supplement with respect to the various priorities and other rights as among the various classes of Senior Securities or Subordinate Securities, as the case may be. With respect to any Senior/Subordinate Series of Securities, the total amount available for distribution on each Payment Date, as well as the method for allocating such amount among the various classes of Securities included in such series, will be as set forth in the related Prospectus Supplement. Generally, the amount available for contribution will be allocated first to interest on the Senior Securities of such series, and then to principal of the Senior Securities up to the amounts determined as specified in the related Prospectus Supplement, prior to allocation to the Subordinate Securities of such series. In the event of any Realized Losses (as defined below) on Mortgage Loans not in excess of the limitations described below, other than Extraordinary Losses, the rights of the Subordinate Securityholders to receive distributions with respect to the Mortgage Loans will be subordinate to the rights of the Senior Securityholders. With respect to any defaulted Mortgage Loan that becomes a Liquidated Mortgage Loan, through foreclosure sale, disposition of the related Mortgaged Property if acquired by deed in lieu of foreclosure, 'charged-off' or otherwise, the amount of loss realized, if any (as more fully described in the related Pooling and Servicing Agreement, a 'Realized Loss'), will equal the portion of the stated principal balance remaining, after application of all amounts recovered (net of amounts reimbursable to the Master Servicer for related advances and expenses) towards interest and principal owing on the Mortgage Loan. With respect to a Mortgage Loan the principal balance of which has been reduced in connection with bankruptcy proceedings, the amount of such reduction will be treated as a Realized Loss. Except as noted below, all Realized Losses will be allocated to the Subordinate Securities of the related series, until the Principal Balance (as defined in the related Prospectus Supplement) of such Subordinate Securities thereof has been reduced to zero. Any additional Realized Losses will be allocated to the Senior Securities (or, if such series includes more than one class of Senior Securities, either on a pro-rata basis among all of the Senior Securities in proportion to their respective outstanding Principal Balances or as otherwise provided in the related Prospectus Supplement). With respect to certain Realized Losses resulting from physical damage to Mortgaged Properties that are generally of the same type as are covered under a special hazard insurance policy, the amount thereof that may be allocated to the Subordinate Securities of the related series may be limited to an amount (the 'Special Hazard Amount') specified in the related Prospectus Supplement. See 'Description of Credit Enhancement--Special Hazard Insurance Policies.' If so, any Special Hazard Losses in excess of the Special Hazard Amount will be allocated among all outstanding classes of Securities of the related series, either on a pro-rata basis in proportion to their outstanding Security Principal Balances, regardless of whether any Subordinate Securities remain outstanding, or as otherwise provided in the related Prospectus Supplement. The respective amounts of other specified types of losses (including Fraud Losses and Bankruptcy Losses) that may be borne solely by the Subordinate Securities may be similarly limited to an amount (with respect to Fraud Losses, the 'Fraud Loss Amount' and with respect to Bankruptcy Losses, the 'Bankruptcy Loss Amount'), and the Subordinate Securities may provide no coverage with respect to certain other specified types of losses, as described in the related Prospectus Supplement, in which case such losses would be allocated on a pro-rata basis among all outstanding classes of Securities. Any allocation of a Realized Loss (including a Special Hazard Loss) to a Security in a Senior/Subordinate Series will be made by reducing the Security Principal Balance thereof as of the Payment Date following the calendar month in which such Realized Loss was incurred. 49 In lieu of the foregoing provisions, subordination may be effected in the following manner, or in any other manner described in the related Prospectus Supplement. The rights of the holders of Subordinate Securities to receive any or a specified portion of distributions with respect to the Mortgage Loans may be subordinated to the extent of the amount set forth in the related Prospectus Supplement (the 'Subordinate Amount'). As specified in the related Prospectus Supplement, the Subordinate Amount may be subject to reduction based upon the amount of losses borne by the holders of the Subordinate Securities as a result of such subordination, a specified schedule or such other method of reduction as such Prospectus Supplement may specify. If so specified in the related Prospectus Supplement, additional credit support for this form of subordination may be provided by the establishment of a reserve fund for the benefit of the holders of the Senior Securities (which may, if such Prospectus Supplement so provides, initially be funded by a cash deposit by the Originator) into which certain distributions otherwise allocable to the holders of the Subordinate Securities may be placed; such funds would thereafter be available to cure shortfalls in distributions to holders of the Senior Securities. DESCRIPTION OF CREDIT ENHANCEMENT Unless otherwise expressly provided and described in the applicable Prospectus Supplement, each series of Securities shall have credit support (referred to herein as 'Credit Enhancement') comprised of one or more of the following components. Each component will have a monetary limit and will provide coverage with respect to Realized Losses that are (i) attributable to the Mortgagor's failure to make any payment of principal or interest as required under the Mortgage Note, but not including Special Hazard Losses, Extraordinary Losses or other losses resulting from damage to a Mortgaged Property, Bankruptcy Losses or Fraud Losses (any such loss, a 'Defaulted Mortgage Loss'); (ii) of a type generally covered by a special hazard insurance policy (as defined below) (any such loss, a 'Special Hazard Loss'); (iii) attributable to certain actions which may be taken by a bankruptcy court in connection with a Mortgage Loan, including a reduction by a bankruptcy court of the principal balance of or the Mortgage Rate on a Mortgage Loan or an extension of its maturity (any such loss, a 'Bankruptcy Loss'); and (iv) incurred on defaulted Mortgage Loans as to which there was fraud in the origination of such Mortgage Loans (any such loss, a 'Fraud Loss'). Losses occasioned by war, civil insurrection, certain governmental actions, nuclear reaction and certain other risks ('Extraordinary Losses') will not be covered unless otherwise specified. To the extent that the Credit Enhancement for any series of Securities is exhausted, the Securityholders will bear all further risks of loss not otherwise insured against. As set forth below and in the applicable Prospectus Supplement, Credit Enhancement may be provided with respect to one or more classes of a series of Securities or with respect to the Mortgage Assets in the related Trust. Credit Enhancement may be in the form of (i) the subordination of one or more classes of Subordinate Securities to provide credit support to one or more classes of Senior Securities as described under 'Subordination,' (ii) the use of a mortgage pool insurance policy, special hazard insurance policy, bankruptcy bond, reserve fund, letter of credit, financial guaranty insurance policy, other third party guarantees, another method of Credit Enhancement described in the related Prospectus Supplement, or the use of a cross-support feature or overcollateralization, or (iii) any combination of the foregoing. Unless otherwise specified in the Prospectus Supplement, any Credit Enhancement will not provide protection against all risks of loss and will not guarantee repayment of the entire principal balance of the Securities and interest thereon. If losses occur that exceed the amount covered by Credit Enhancement or are not covered by the Credit Enhancement, holders of one or more classes of Securities will bear their allocable share of deficiencies. If a form of Credit Enhancement applies to several classes of Securities, and if principal payments equal to the aggregate principal balances of certain classes will be distributed prior to such distributions to the classes, the classes that receive such distributions at a later time are more likely to bear any losses that exceed the amount covered by Credit Enhancement. The amounts and type of Credit Enhancement arrangement as well as the provider thereof, if applicable, with respect to each series of Securities will be set forth in the related Prospectus Supplement. To the extent provided in the applicable Prospectus Supplement and the Pooling and Servicing Agreement, the Credit Enhancement arrangements may be periodically modified, reduced and substituted for based on the aggregate outstanding principal balance of the Mortgage Loans covered thereby. See 'Description of Credit Enhancement--Reduction or Substitution of Credit Enhancement.' If specified in the applicable Prospectus Supplement, Credit Enhancement for a series of Securities may cover one or more other series of Securities. 50 The descriptions of any insurance policies or bonds described in this Prospectus or any Prospectus Supplement and the coverage thereunder do not purport to be complete and are qualified in their entirety by reference to the actual forms of such policies, copies of which are available upon request. Letter of Credit. If any component of Credit Enhancement as to any series of Securities is to be provided by a letter of credit (the 'Letter of Credit'), a bank (the 'Letter of Credit Bank') will deliver to the Trustee an irrevocable Letter of Credit. The Letter of Credit may provide direct coverage with respect to the related Securities or, if specified in the related Prospectus Supplement, support the Sponsor's or any other person's obligation pursuant to a Purchase Obligation to make certain payments to the Trustee with respect to one or more components of Credit Enhancement. The Letter of Credit Bank, as well as the amount available under the Letter of Credit with respect to each component of Credit Enhancement, will be specified in the applicable Prospectus Supplement. The Letter of Credit will expire on the expiration date set forth in the related Prospectus Supplement, unless earlier terminated or extended in accordance with its terms. On or before each Payment Date, either the Letter of Credit Bank or the Trustee (or other obligor under a Purchase Obligation) will be required to make the payments specified in the related Prospectus Supplement after notification from the Trustee, to be deposited in the related Distribution Account, if and to the extent covered, under the applicable Letter of Credit. Mortgage Pool Insurance Policies. Any mortgage pool insurance policy ('Mortgage Pool Insurance Policy') obtained by the Sponsor for each related Trust Estate will be issued by the Pool Insurer named in the related Prospectus Supplement. Each Mortgage Pool Insurance Policy will, subject to limitations specified in the related Prospectus Supplement described below, cover Defaulted Mortgage Losses in an amount equal to a percentage specified in the related Prospectus Supplement (or in a Current Report on Form 8-K) of the aggregate principal balance of the Mortgage Loans on the Cut-Off Date. As set forth under 'Maintenance of Credit Enhancement,' the Master Servicer will use reasonable efforts to maintain the Mortgage Pool Insurance Policy and to present claims thereunder to the Pool Insurer on behalf of itself, the Trustee and the Securityholders. The Mortgage Pool Insurance Policies, however, are not blanket policies against loss (typically, such policies do not cover Special Hazard Losses, Fraud Losses and Bankruptcy Losses), since claims thereunder may only be made respecting particular defaulted Mortgage Loans and only upon satisfaction of certain conditions precedent described below due to a failure to pay irrespective of the reason therefor. Special Hazard Insurance Policies. Any insurance policy covering Special Hazard Losses (a 'Special Hazard Insurance Policy') obtained by the Sponsor for a Trust Estate will be issued by the insurer named in the related Prospectus Supplement. Each Special Hazard Insurance Policy will, subject to limitations described in the related Prospectus Supplement, protect holders of the related series of Securities from (i) losses due to direct physical damage to a Mortgaged Property other than any loss of a type covered by a hazard insurance policy or a flood insurance policy, if applicable, and (ii) losses from partial damage caused by reason of the application of the co-insurance clauses contained in hazard insurance policies. See 'Hazard Insurance; Claims Thereunder.' A Special Hazard Insurance Policy will not cover Extraordinary Losses. Aggregate claims under a Special Hazard Insurance Policy will be limited to a maximum amount of coverage, as set forth in the related Prospectus Supplement or in a Current Report on Form 8-K. A Special Hazard Insurance Policy will provide that no claim may be paid unless hazard and, if applicable, flood insurance on the Mortgaged Property securing the Mortgage Loan has been kept in force and other protection and preservation expenses have been paid by the Master Servicer. Subject to the foregoing limitations, in general a Special Hazard Insurance Policy will provide that, where there has been damage to property securing a foreclosed Mortgage Loan (title to which has been acquired by the insured) and to the extent such damage is not covered by the hazard insurance policy or flood insurance policy, if any, maintained by the Mortgagor or the Master Servicer or the Sub-Servicer, the insurer will pay the lesser of (i) the cost of repair or replacement of such property or (ii) up on transfer of the property to the insurer, the unpaid principal balance of such Mortgage Loan at the time of acquisition of such property by foreclosure or deed in lieu of foreclosure, plus accrued interest at the Mortgage Rate to the date of claim settlement and certain expenses incurred by the Master Servicer or the Sub-Servicer with respect to such property. If the property is transferred to a third party in a sale approved by the issuer of the Special Hazard Insurance Policy (the 'Special Hazard Insurer'), the amount that the Special Hazard Insurer will pay will be the amount under (ii) above reduced by the net proceeds of the sale of the property. 51 As indicated under 'Description of the Securities--Assignment of Mortgage Loans' above and to the extent set forth in the related Prospectus Supplement, coverage in respect of Special Hazard Losses for a series of Securities may be provided, in whole or in part by a type of special hazard instrument other than a Special Hazard Insurance Policy or by means of the special hazard representation of the Sponsor. Bankruptcy Bonds. In the event of a personal bankruptcy of a Mortgagor, it is possible that the bankruptcy court may establish the value of the Mortgaged Property of such Mortgagor at an amount less than the then-outstanding, principal balance of the Mortgage Loan secured by such Mortgaged Property (a 'Deficient Valuation'). The amount of the secured debt then could be reduced to such value, and, thus, the holder of such Mortgage Loan would become an unsecured creditor to the extent the outstanding principal balance of such Mortgage Loan exceeds the value assigned to the Mortgaged Property by the bankruptcy court. In addition, certain other modifications of the terms of a Mortgage Loan can result from a bankruptcy proceeding, including a reduction in the amount of the monthly payment on the related Mortgage Loan or a reduction in the mortgage interest rate (a 'Debt Service Reduction'; Debt Service Reductions and Deficient Valuations, collectively referred to herein as 'Bankruptcy Losses'). See 'Certain Legal Aspects of Mortgage Loans and Related Matters--Anti-Deficiency Legislation and Other Limitations on Lenders.' Any bankruptcy bond ('Bankruptcy Bond') to provide coverage for Bankruptcy Losses for proceedings under the federal Bankruptcy Code obtained by the Sponsor for a Trust Estate will be issued by an insurer named in the related Prospectus Supplement. The level of coverage under each Bankruptcy Bond will be set forth in the applicable Prospectus Supplement or in a Current Report on Form 8-K. Reserve Funds. If so provided in the related Prospectus Supplement, the Sponsor will deposit or cause to be deposited in an account (a 'Reserve Fund') any combination of cash, one or more irrevocable letters of credit or one or more Eligible Investments in specified amounts, amounts otherwise distributable to Subordinate Securityholders or the owners of any Originator's Retained Yield, or any other instrument satisfactory to the Rating Agency or Agencies, which will be applied and maintained in the manner and under the conditions specified in such Prospectus Supplement. In the alternate or in addition to such deposit to the extent described in the related Prospectus Supplement, a Reserve Fund may be funded through application of all or a portion of amounts otherwise payable on any related Subordinate Securities from the Originator's Retained Yield or otherwise. In addition, with respect to any series of Securities as to which Credit Enhancement includes a Letter of Credit, if so specified in the related Prospectus Supplement, under certain circumstances the remaining amount of the Letter of Credit may be drawn by the Trustee and deposited in a Reserve Fund. Amounts in a Reserve Fund may be distributed to Securityholders, or applied to reimburse the Master Servicer for outstanding advances or may be used for other purposes, in the manner and to the extent specified in the related Prospectus Supplement. A Trust Estate may contain more than one Reserve Fund, each of which may apply only to a specified class of Securities or to specified Mortgage Assets. Financial Guaranty Insurance Policies. If so specified in the related Prospectus Supplement, a financial guaranty insurance policy or surety bond ('Financial Guaranty Insurance Policy') may be obtained and maintained for each class or series of Securities. The issuer of any Financial Guaranty Insurance Policy (a 'Financial Guaranty Insurer') will be described in the related Prospectus Supplement. A copy of any such Financial Guaranty Insurance Policy will be attached as an exhibit to the related Prospectus Supplement. Unless otherwise specified in the related Prospectus Supplement, a Financial Guaranty Insurance Policy will unconditionally and irrevocably guarantee to Securityholders that an amount equal to each full and complete insured payment will be received by an agent of the Trustee (an 'Insurance Paying Agent') on behalf of Securityholders, for distribution by the Trustee to each Securityholder. The 'insured payment' will be defined in the related Prospectus Supplement, and will generally equal the full amount of the distributions of principal and interest to which Securityholders are entitled under the related Pooling and Servicing Agreement plus any other amounts specified therein or in the related Prospectus Supplement (the 'Insured Payment'). Financial Guaranty Insurance Policies may apply only to certain specified classes, or may apply at the Mortgage Asset level and only to specified Mortgage Assets. The specific terms of any Financial Guaranty Insurance Policy will be as set forth in the related Prospectus Supplement. Financial Guaranty Insurance Policies may have limitations including (but not limited to) limitations on the insurer's obligation to guarantee the obligations of the Originators to repurchase or substitute for any 52 Mortgage Loans, Financial Guaranty Insurance Policies will not guarantee any specified rate of prepayments and/or to provide funds to redeem Securities on any specified date. Subject to the terms of the related Pooling and Servicing Agreement, the Financial Guaranty Insurer may be subrogated to the rights of each Securityholder to receive payments under the Securities to the extent of any payment by such Financial Guaranty Insurer under the related Financial Guaranty Insurance Policy. Other Insurance, Guarantees and Similar Instruments or Agreements. If specified in the related Prospectus Supplement, a Trust may include in lieu of some or all of the foregoing or in addition thereto third party guarantees, and other arrangements for maintaining timely payments or providing additional protection against losses on all or any specified portion of the assets included in such Trust, paying administrative expenses, or accomplishing such other purpose as may be described in the Prospectus Supplement. The Trust may include a guaranteed investment contract or reinvestment agreement pursuant to which funds held in one or more accounts will be invested at a specified rate. If any class of Securities has a floating interest rate, or if any of the Mortgage Assets has a floating interest rate, the Trust may include an interest rate swap contract, an interest rate cap agreement or similar contract providing limited protection against interest rate risks. Cross Support. If specified in the Prospectus Supplement, the beneficial ownership of separate groups of assets included in a Trust may be evidenced by separate classes of the related series of Securities. In such case, credit support may be provided by a cross-support feature which requires that distributions be made with respect to one class of Securities may be made from excess amounts available from other asset groups within the same Trust which support other classes of Securities. The Prospectus Supplement for a series that includes a cross-support feature will describe the manner and conditions for applying such cross-support feature. If specified in the Prospectus Supplement, the coverage provided by one or more forms of credit support may apply concurrently to two or more separate Trusts. If applicable, the Prospectus Supplement will identify the Trusts to which such credit support relates and the manner of determining the amount of the coverage provided thereby and of the application of such coverage to the identified Trusts. Overcollateralization. If specified in the Prospectus Supplement, subordination provisions of a Trust may be used to accelerate to a limited extent the amortization of one or more classes of Securities relative to the amortization of the related Mortgage Loans. The accelerated amortization is achieved by the application of certain excess interest to the payment of principal of one or more classes of Securities. This acceleration feature creates, with respect to the Mortgage Loans or groups thereof, over collateralization which results from the excess of the aggregate principal balance of the related Mortgage Loans, or a group thereof, over the principal balance of the related class of Securities. Such acceleration may continue for the life of the related Security, or may be limited. In the case of limited acceleration, once the required level of overcollateralization is reached, and subject to certain provisions specified in the related Prospectus Supplement, such limited acceleration feature may cease, unless necessary to maintain the required level of overcollateralization. Maintenance of Credit Enhancement. To the extent that the applicable Prospectus Supplement does not expressly provide for Credit Enhancement arrangements in lieu of some or all of the arrangements mentioned below, the following paragraphs shall apply. If a form of Credit Enhancement has been obtained for a series of Securities, the Sponsor will be obligated to exercise its best reasonable efforts to keep or cause to be kept such form of credit support in full force and effect throughout the term of the applicable Pooling and Servicing Agreement, unless coverage thereunder has been exhausted through payment of claims or otherwise, or substitution therefor is made as described below under 'Reduction or Substitution of Credit Enhancement.' In lieu of the Sponsor's obligation to maintain a particular form of Credit Enhancement, the Sponsor may obtain a substitute or alternate form of Credit Enhancement. If the Master Servicer obtains such a substitute form of Credit Enhancement, it will maintain and keep such form of Credit Enhancement in full force and effect as provided herein. Prior to its obtaining any substitute or alternate form of Credit Enhancement, the Sponsor will obtain written confirmation from the Rating Agency or Agencies that rated the related series of Securities that the substitution or alternate form of Credit Enhancement for the existing Credit Enhancement will not adversely affect the then-current ratings assigned to such Securities by such Rating Agency or Agencies. 53 The Master Servicer, on behalf of itself, the Trustee and Securityholders, will provide the Trustee information required for the Trustee to draw under a Letter of Credit or Financial Guaranty Insurance Policy, will present claims to each Pool Insurer, to the issuer of each Special Hazard Insurance Policy or other special hazard instrument, to the issuer of each Bankruptcy Bond and will take such reasonable steps as are necessary to permit recovery under such Letter of Credit, Financial Guaranty Insurance Policy, Purchase Obligation, insurance policies or comparable coverage respecting defaulted Mortgage Loans or Mortgage Loans which are the subject of a bankruptcy proceeding. Additionally, the Master Servicer will present such claims and take such steps as are reasonably necessary to provide for the performance by another party of its Purchase Obligation. As set forth above, all collections by the Master Servicer under any Purchase Obligation, any Mortgage Pool Insurance Policy, or any Bankruptcy Bond and, where the related property has not been restored, any Special Hazard Insurance Policy, are to be deposited initially in the Principal and Interest Account and ultimately in the Distribution Account, subject to withdrawal as described above. All draws under any Letter of Credit or Financial Guaranty Insurance Policy will be deposited directly in the Distribution Account. If any property securing a defaulted Mortgage Loan is damaged and proceeds, if any, from the related hazard insurance policy or any applicable Special Hazard Instrument are insufficient to restore the damaged property to a condition sufficient to permit recovery under any applicable form of Credit Enhancement, the Master Servicer is not required to expend its own funds to restore the damaged property unless it determines (i) that such restoration will increase the proceeds to one or more classes of Securityholders on liquidation of the Mortgage Loan after reimbursement of the Master Servicer for its expenses and (ii) that such expenses will be recoverable by it through Liquidation Proceeds or Insurance Proceeds. If recovery under any applicable form of Credit Enhancement is not available because the Master Servicer has been unable to make the above determinations, has made such determinations incorrectly or recovery is not available for any other reason, the Master Servicer is nevertheless obligated to follow such normal practices and procedures (subject to the preceding sentence) as it deems necessary or advisable to realize upon the defaulted Mortgage Loan and in the event such determination has been incorrectly made, is entitled to reimbursement of its expenses in connection with such restoration. Reduction or Substitution of Credit Enhancement. Unless otherwise specified in the related Prospectus Supplement, the amount of credit support provided pursuant to any of the Credit Enhancements (including, without limitation, a Mortgage Pool Insurance Policy, Financial Guaranty Insurance Policy, Special Hazard Insurance Policy, Bankruptcy Bond, Letter of Credit, or any alternative form of Credit Enhancement) may be reduced under certain specified circumstances. In addition, if so described in the related Prospectus Supplement, any formula used in calculating the amount or degree of Credit Enhancement may be changed without the consent of the Securityholders upon written confirmation from each Rating Agency then rating the Securities that such change will not adversely affect the then-current rating or ratings assigned to the Securities. In most cases, the amount available pursuant to any Credit Enhancement will be subject to periodic reduction in accordance with a schedule or formula on a nondiscretionary basis pursuant to the terms of the related Pooling and Servicing Agreement as the aggregate outstanding principal balance of the Mortgage Loans declines. Additionally, in certain cases, such credit support (and any replacements therefor) may be replaced, reduced or terminated upon the written assurance from each applicable Rating Agency that the then-current rating of the related series of Securities will not be adversely affected. Furthermore, in the event that the credit rating of any obligor under any applicable Credit Enhancement is downgraded, the credit rating of the related Securities may be downgraded to a corresponding level, and, unless otherwise specified in the related Prospectus Supplement, the Sponsor thereafter will not be obligated to obtain replacement credit support in order to restore the rating of the Securities, and also will be permitted to replace such credit support with other Credit Enhancement instruments issued by obligors whose credit ratings are equivalent to such downgraded level and in lower amounts which would satisfy such downgraded level, provided that the then-current, albeit downgraded, rating of the related series of Securities is maintained. Where the credit support is in the form of a Reserve Fund, a permitted reduction in the amount of Credit Enhancement will result in a release of all or a portion of the assets in the Reserve Fund to the Sponsor, the Master Servicer, one or more Originators or such other person that is entitled thereto. Any assets so released will not be available to fund distribution obligations in future periods. 54 HAZARD INSURANCE; CLAIMS THEREUNDER Each Mortgage Loan will be required to be covered by a hazard insurance policy (as described below). The following is only a brief description of certain insurance policies and does not purport to summarize or describe all of the provisions of these policies. Such insurance is subject to underwriting and approval of individual Mortgage Loans by the respective insurers. The descriptions of any insurance policies described in this Prospectus or any Prospectus Supplement and the coverage thereunder do not purport to be complete and are qualified in their entirety by reference to such forms of policies, sample copies of which are available from the Trustee upon request. HAZARD INSURANCE POLICIES The terms of the Mortgage Loans require each Mortgagor to maintain a hazard insurance policy for the Mortgage Loan. Additionally, the Pooling and Servicing Agreement will require the Master Servicer to cause to be maintained with respect to each Mortgage Loan a hazard insurance policy with a generally acceptable carrier that provides for fire and extended coverage relating to such Mortgage Loan in an amount not less than the least of (i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum amount required to compensate for damage or loss on a replacement cost basis or (iii) the full insurable value of the premises. If a Mortgage Loan at the time of origination relates to a Mortgaged Property in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, the Master Servicer will be required to maintain with respect thereto a flood insurance policy in a form meeting the requirements of the then-current guidelines of the Federal Insurance Administration with a generally acceptable carrier in an amount representing coverage, and which provides for recovery by the Master Servicer on behalf of the Trust of insurance proceeds relating to such Mortgage Loan of not less than the least of (i) the outstanding principal balance of the Mortgage Loan, (ii) the minimum amount required to compensate for damage or loss on a replacement cost basis, (iii) the maximum amount of insurance that is available under the Flood Disaster Protection Act of 1973. Pursuant to the related Pooling and Servicing Agreement, the Master Servicer will be required to indemnify the Trust out of the Master Servicer's own funds for any loss to the Trust resulting from the Master Servicer's failure to maintain such flood insurance. In the event that the Master Servicer obtains and maintains a blanket policy insuring against fire with extended coverage and against flood hazards on all of the Mortgage Loans, then, to the extent such policy names the Master Servicer as loss payee and provides coverage in an amount equal to the aggregate unpaid principal balance on the Mortgage Loans without co-insurance, and otherwise complies with the requirements of the Pooling and Servicing Agreement, the Master Servicer shall be deemed conclusively to have satisfied its obligations with respect to fire and hazard insurance coverage under the Pooling and Servicing Agreement. Such blanket policy may contain a deductible clause, in which case the Master Servicer will be required, in the event that there shall not have been maintained on the related Mortgaged Property a policy complying with the Pooling and Servicing Agreement, and there shall have been a loss that would have been covered by such policy, to deposit in the Principal and Interest Account from the Master Servicer's own funds the difference, if any, between the amount that would have been payable under a policy complying with the Pooling and Servicing Agreement and the amount paid under such blanket policy. THE SPONSOR AND THE TRANSFEROR The Sponsor, ADVANTA Mortgage Conduit Services, Inc., was incorporated in the State of Delaware in April, 1993. It is a direct subsidiary of the Master Servicer, Advanta Mortgage Corp. USA, in addition to ADVANTA Mortgage Corp. Midatlantic, ADVANTA Mortgage Corp., Midatlantic II, ADVANTA Mortgage Corp. Midwest, ADVANTA Mortgage Corp. of New Jersey and ADVANTA Mortgage Corp. Northeast. The Sponsor was organized for the purpose of the purchase and securitization of first and junior mortgage loans. The Sponsor maintains its principal office at 16875 West Bernardo Drive, San Diego, California 92127. Its telephone number is (619) 674-1800. The Transferor, ADVANTA Mortgage Receivables Inc., was incorporated in the State of Delaware in February, 1994. It is a direct subsidiary of the Sponsor, and was formed as a special purpose finance subsidiary to 55 facilitate certain issuances of Securities. The use of the Transferor will not affect the obligations of the Sponsor with respect to the related Trust or the related Securities. If the Transferor is to be involved in a particular offering the related Prospectus Supplement will describe its role in such offering; for purposes of this Prospectus the role of the Transferor is subsumed in the role of the Sponsor. The Transferor maintains its principal office at Brandywine Corporate Center, 650 Naamans Road, Claymont, Delaware 19703. Its telephone number is (302) 791-4400. THE MASTER SERVICER Unless otherwise specified in the related Prospectus Supplement, ADVANTA Mortgage Corp. USA will act as the Master Servicer for a series of Securities. ADVANTA Mortgage Corp. USA was acquired by ADVANTA Corp., a Delaware corporation ('ADVANTA Parent') in September, 1986 and is an indirect subsidiary of ADVANTA Parent. The Master Servicer is an affiliate of Colonial National Bank USA ('Colonial'), a national banking association domiciled in Delaware, and the parent of ADVANTA Mortgage Corp. Midatlantic, ADVANTA Mortgage Corp. Midatlantic II, ADVANTA Mortgage Corp. Midwest, ADVANTA Mortgage Corp. of New Jersey and ADVANTA Mortgage Corp. Northeast. ADVANTA Mortgage Corp. USA is a Delaware corporation incorporated in 1983. It is a nationwide servicer of first and junior mortgage loans. ADVANTA Mortgage Corp. USA has centralized servicing functions located in San Diego, California. This provides for economies of scale and a depth of appraisal, attorney and realtor contacts throughout the country. THE POOLING AND SERVICING AGREEMENT As described above under 'Description of the Securities--General,' each series of Securities will be issued pursuant to a Pooling and Servicing Agreement as described in that section. The following summaries describe certain additional provisions common to each Pooling and Servicing Agreement. SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES; ORIGINATOR'S RETAINED YIELD Each servicer, whether the Master Servicer or any Sub-Servicer (either the Master Servicer or any Sub-Servicer being a 'Servicer'), will retain a fee in connection with its servicing activities for each series of Securities equal to the percentage per annum specified in the related Prospectus Supplement or Current Report on Form 8-K (the 'Base Servicing Fee'), generally payable monthly with respect to each Mortgage Loan directly serviced by such Servicer at one-twelfth the annual rate, of the then-outstanding principal amount of each such Mortgage Loan as of the first day of each calendar month. The Master Servicer acting as master servicer with respect to Mortgage Loans being serviced directly by a Sub-Servicer will retain a fee equal to the percentage per annum specified in the related Prospectus Supplement or Current Report on Form 8-K ('Master Servicing Fee'), generally payable monthly on one-twelfth the annual rate, of the then-outstanding principal amount of each such Mortgage Loan as of the first day of each calendar month. The Base Servicing Fees and the Master Servicing Fee are collectively referred to as the 'Servicing Fee.' In addition to the Base Servicing Fee, each Servicer will generally be entitled under the Pooling and Servicing Agreement to retain additional servicing compensation in the form of prepayment charges, release fees, bad check charges, assumption fees, late payment charges, or any other servicing-related fees, Net Liquidation Proceeds not required to be deposited in the Principal and Interest Account pursuant to the Pooling and Servicing Agreement, and similar items. Unless otherwise specified in the related Prospectus Supplement, the Master Servicer will pay or cause to be paid certain ongoing expenses associated with each Trust Estate and incurred by it in connection with its responsibilities under the Pooling and Servicing Agreement, including, without limitation, payment of any fee or other amount payable in respect of any alternative Credit Enhancement arrangements, payment of the fees and disbursements of the Trustee or accountant, any custodian appointed by the Trustee, the Security Registrar and any Paying Agent, and payment of expenses incurred in enforcing the obligations of Sub-Servicers and Originators. The Master Servicer may be entitled to reimbursement of expenses incurred in enforcing the 56 obligations of Sub-Servicers and Originators under certain limited circumstances. In addition, as indicated in the preceding section, the Master Servicer will be entitled to reimbursements for certain expenses incurred by it in connection with Liquidated Mortgage Loans and in connection with the restoration of Mortgaged Properties, such right of reimbursement being prior to the rights of Securityholders to receive any related Liquidation Proceeds (including Insurance Proceeds). The Prospectus Supplement for a series of Securities will specify if there will be any Originator's Retained Yield retained. Any such Originator's Retained Yield will be a specified portion of the interest payable on each Mortgage Loan in a Mortgage Pool. Any such Originator's Retained Yield will be established on a loan-by-loan basis and the amount thereof with respect to each Mortgage Loan in a Mortgage Pool will be specified on an exhibit to the related Pooling and Servicing Agreement. Any Originator's Retained Yield in respect of a Mortgage Loan will represent a specified portion of the interest payable thereon and will not be part of the related Trust Estate. Any partial recovery of interest in respect of a Mortgage Loan will be allocated between the owners of any Originator's Retained Yield and the holders of classes of Securities entitled to payments of interest as provided in the Prospectus Supplement and the applicable Pooling and Servicing Agreement. EVIDENCE AS TO COMPLIANCE Each Pooling and Servicing Agreement will require the Master Servicer to deliver annually to the Trustee and any Credit Enhancer, an officers' certificate stating, as to each signer thereof, that (i) a review of the activities of the Master Servicer during such preceding year and of performance under the related Pooling and Servicing Agreement has been made under such officers' supervision, and (ii) to the best of such officers' knowledge, based on such review, the Master Servicer has fulfilled all its obligations under the related Pooling and Servicing Agreement for such year, or, if there has been a default in the fulfillment of any such obligations, specifying each such default known to such officers and the nature and status thereof including the steps being taken by the Master Servicer to remedy such defaults. Each Pooling and Servicing Agreement will require the Master Servicer to cause to be delivered to the Trustee and any Credit Enhancer a letter or letters of a firm of independent, nationally recognized certified public accountants reasonably acceptable to the Credit Enhancer, if applicable, stating that such firm has, with respect to the Master Servicer's overall servicing operations (i) performed applicable tests in accordance with the compliance testing procedures as set forth in Appendix 3 of the Audit Guide for Audits of HUD Approved Nonsupervised Mortgagees or (ii) examined such operations in accordance with the requirements of the Uniform Single Audit Program for Mortgage Bankers, and in either case stating such firm's conclusions relating thereto. Copies of the annual accountants' statement and the annual statement of officers of the Master Servicer may be obtained by Securityholders without charge upon written request to the Master Servicer. REMOVAL AND RESIGNATION OF THE MASTER SERVICER Unless otherwise specified in the related Prospectus Supplement, each Pooling and Servicing Agreement will provide that the Master Servicer may not resign from its obligations and duties thereunder, except in connection with a permitted transfer of servicing, unless such duties and obligations are no longer permissible under applicable law or are in material conflict by reason of applicable law with any other activities of a type and nature presently carried on by it. No such resignation will become effective until the Trustee has assumed the Master Servicer's obligations and duties under the Pooling and Servicing Agreement. The Trustee, the Securityholders or a Credit Enhancer, if applicable, will have the right, pursuant to the related Pooling and Servicing Agreement, to remove the Master Servicer upon the occurrence of any of (a) certain events of insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings regarding the Master Servicer and certain actions by the Master Servicer indicating its insolvency or inability to pay its obligations; (b) the failure of the Master Servicer to perform any one or more of its material obligations under the Pooling and Servicing Agreement as to which the Master Servicer shall continue in default with respect thereto for a specified period, generally of sixty (60) days, after notice by the Trustee or any Credit Enhancer (if required by the Pooling and Servicing Agreement) of said failure; or (c) the failure of the Master Servicer to cure any breach of any of its representations and warranties set forth in the Pooling and Servicing Agreement which materially and adversely 57 affects the interests of the Securityholders or any Credit Enhancer, for a specified period, generally of thirty (30) days after the Master Servicer's discovery or receipt of notice thereof. The Pooling and Servicing Agreement may also provide that the related Credit Enhancer may remove the Master Servicer upon the occurrence of any of certain events including: (i) with respect to any Payment Date, if the total available funds with respect to the Mortgage Loans Group will be less than the related distribution amount on the class of credit-enhanced securities in respect of such Payment Date; provided, however, that the Credit Enhancer generally will have no right to remove the Master Servicer pursuant to the provision described in this clause (i) if the Master Servicer can demonstrate to the reasonable satisfaction of the Credit Enhancer that such event was due to circumstances beyond the control of the Master Servicer; (ii) the failure by the Master Servicer to make any required Servicing Advance; (iii) the failure of the Master Servicer to perform one or more of its material obligations under the Pooling and Servicing Agreement; or (iv) the failure by the Master Servicer to make any required Delinquency Advance or to pay any Compensating Interest; provided, however, that prior to any removal of the Master Servicer by the related Credit Enhancer pursuant to clauses (i), (ii) or (iii) above the Master Servicer shall first have been given by the related Credit Enhancer notice of the occurrence of one or more of the events set forth in clauses (i) or (ii) above and the Master Servicer shall not have remedied, or shall not have taken action satisfactory to such Credit Enhancer to remedy, such event or events within a specified period, generally 30 days (60 days with respect to clause (iii)) after the Master Servicer's receipt of such notice; and provided, further that in the event of the refusal or inability of the Master Servicer to make any required Delinquency Advance or to pay any Compensating Interest as described in clause (iv) above, such removal shall be effective (without the requirement of any action on the part of such Credit Enhancer or of the Trustee) not later than a shorter specified period, generally not in excess of five business days, following the day on which the Trustee notifies an authorized officer of the Master Servicer that a required Delinquency Advance or to pay any Compensating Interest has not been received by the Trustee. AMENDMENTS The Trustee, the Sponsor and the Master Servicer may at any time and from time to time, with the prior approval of the related Credit Enhancer, if required, but without the giving of notice to or the receipt of the consent of the Securityholders, amend a Pooling and Servicing Agreement, and the Trustee will be required to consent to such amendment, for the purposes of (x) (i) curing any ambiguity, or correcting or supplementing any provision of such Pooling and Servicing Agreement which may be inconsistent with any other provision of the Pooling and Servicing Agreement, (ii) in connection with a Trust making REMIC elections, if accompanied by an approving opinion of counsel experienced in federal income tax matters, removing the restriction against the transfer of a REMIC residual security to a Disqualified Organization (as such term is defined in the Code) or (iii) complying with the requirements of the Code and the regulations proposed or promulgated thereunder; provided, however, that such action shall not, as evidenced by an opinion of counsel delivered to the Trustee, materially and adversely affect the interests of any Securityholder (without its written consent) or (y) such other purposes set forth in the related Pooling and Servicing Agreement. Unless otherwise specified in the related Prospectus Supplement, each Pooling and Servicing Agreement may also be amended by the Trustee, the Sponsor and the Master Servicer at any time and from time to time, with the prior written approval of the related Credit Enhancer, if required, and not less than a majority of the Percentage Interest represented by each related class of Securities then outstanding, for the purpose of adding any provisions or changing in any manner or eliminating any of the provisions of such Pooling and Servicing Agreement or of modifying in any manner the rights of the Securityholders thereunder; provided, however, that no such amendment shall (a) change in any manner the amount of, or delay the timing of, payments which are required to be distributed to any Securityholders without the consent of the holder of such Security or (b) change the aforesaid percentages of Percentage Interest which are required to consent to any such amendments, without the consent of the holders of all Securities of the class or classes affected then outstanding. 58 TERMINATION; RETIREMENT OF SECURITIES Unless otherwise specified in the related Prospectus Supplement, each Pooling and Servicing Agreement will provide that a Trust will terminate upon the earlier of (i) the payment to the Securityholders of all Securities issued by the Trust from amounts other than those available under, if applicable, the related Credit Enhancement of all amounts required to be paid to such Securityholders upon the later to occur of (a) the final payment or other liquidation (or any advance made with respect thereto) of the last Mortgage Loan in the Trust Estate or (b) the disposition of all property acquired in respect of any Mortgage Loan remaining in the Trust Estate, (ii) any time when a Qualified Liquidation (as defined in the Code) of the Trust Estate (if the related Trust is a REMIC) is effected. In no event, however, will the trust created by the Pooling and Servicing Agreement continue beyond the expiration of 21 years from the death of the survivor of certain persons named in such Pooling and Servicing Agreement. Written notice of termination of the Pooling and Servicing Agreement will be given to each Securityholder, and the final distribution will be made only upon surrender and cancellation of the Securities at an office or agency appointed by the Trustee that will be specified in the notice of termination. If the Securityholders are permitted to terminate the trust under the applicable Pooling and Servicing Agreement, a penalty may be imposed upon the Securityholders based upon the fee that would be foregone by the Master Servicer because of such termination. Any purchase of Mortgage Loans and property acquired in respect of Mortgage Loans evidenced by a series of Securities shall be made at the option of the Master Servicer, the Sponsor or, if applicable, the holder of the REMIC Residual Securities at the price specified in the related Prospectus Supplement. The exercise of such right will effect earlier than expected retirement of the Securities of that series, but the right of the Master Servicer, the Sponsor or, if applicable, such holder to so purchase is, unless otherwise specified in the applicable Prospectus Supplement, subject to the aggregate principal balance of the Mortgage Loans for that series as of any Remittance Date being less than the percentage specified in the related Prospectus Supplement of the aggregate principal balance of the Mortgage Loans at the Cut-Off Date for that series. The Prospectus Supplement for each series of Securities will set forth the amounts that the holders of such Securities will be entitled to receive upon such earlier than expected retirement. If a REMIC election has been made, the termination of the related Trust Estate will be effected in a manner consistent with applicable federal income tax regulations and its status as a REMIC. THE TRUSTEE The Trustee under each Pooling and Servicing Agreement will be named in the related Prospectus Supplement. Each Pooling and Servicing Agreement will provide that the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by the Pooling and Servicing Agreement at the request or direction of any of the Securityholders, unless such Securityholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction. The Trustee may execute any of the trusts or powers granted by each Pooling and Servicing Agreement or perform any duties thereunder either directly or by or through agents or attorneys, and the Trustee will not be responsible for any misconduct or negligence on the part of any agent or attorney appointed and supervised with due care by it thereunder. Pursuant to each Pooling and Servicing Agreement, the Trustee will not be liable for any action it takes or omits to take in good faith which it reasonably believes to be authorized by an authorized officer of any person or within its rights or powers under the Pooling and Servicing Agreement. Unless otherwise described in the related Prospectus Supplement, each Pooling and Servicing Agreement will permit the removal of the Trustee upon the occurrence and continuance of one of the following events: (1) the Trustee shall fail to distribute to the Securityholders entitled thereto on any Payment Date amounts available for distribution in accordance with the terms of the Pooling and Servicing Agreement; or (2) the Trustee shall default in the performance of, or breach, any covenant or agreement of the Trustee in the Pooling and Servicing Agreement, or if any representation or warranty of the Trustee made in the Pooling and Servicing Agreement or in any certificate or other writing delivered pursuant thereto or in 59 connection therewith shall prove to be incorrect in any material respect as of the time when the same shall have been made, and such default or breach shall continue or not be cured for the period then specified in the related Pooling and Servicing Agreement after the Trustee shall have received notice specifying such default or breach and requiring it to be remedied; or (3) a decree or order of a court or agency or supervisory authority having jurisdiction for the appointment of a conservator or receiver or liquidator in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings, or for the winding-up or liquidation of its affairs, shall have been entered against the Trustee, and such decree or order shall have remained in force undischarged or unstayed for the period then specified in the related Pooling and Servicing Agreement; or (4) a conservator or receiver or liquidator or sequestrator or custodian of the property of the Trustee is appointed in any insolvency, readjustment of debt, marshalling of assets and liabilities or similar proceedings of or relating to the Trustee or relating to all or substantially all of its property; or (5) the Trustee shall become insolvent (however insolvency is evidenced), generally fail to pay its debts as they come due, file or consent to the filing of a petition to take advantage of any applicable insolvency or reorganization statute, make an assignment for the benefit of its creditors, voluntarily suspend payment of its obligations, or take corporate action for the purpose of any of the foregoing. If an event described above occurs and is continuing, then, and in every such case (i) the Sponsor, (ii) the Securityholders (on the terms set forth in the related Pooling and Servicing Agreement), or (iii) if there is a Credit Enhancer, such Credit Enhancer may, whether or not the Trustee has resigned, immediately, concurrently with the giving of notice to the Trustee, and without delay, appoint a successor Trustee pursuant to the terms of the Pooling and Servicing Agreement. No Securityholder will have any right to institute any proceeding, judicial or otherwise, with respect to a Pooling and Servicing Agreement or any Credit Enhancement, if applicable, or for the appointment of a receiver or trustee, or for any other remedy under the Pooling and Servicing Agreement, unless: (1) such Securityholder has previously given written notice to the Sponsor and the Trustee of such Securityholder's intention to institute such proceeding; (2) the Securityholders of not less than 25% of the Percentage Interests represented by certain specified classes of Securities then outstanding shall have made written request to the Trustee to institute such proceeding; (3) such Securityholder or Securityholders have offered to the Trustee reasonable indemnity, against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for the period specified in the related Pooling and Servicing Agreement, generally not in excess of 60 days after receipt of such notice, request and offer of indemnity, has failed to institute such proceeding; (5) as long as such action affects any credit-enhanced class of Securities outstanding, the related Credit Enhancer has consented in writing thereto; and (6) no direction inconsistent with such written request has been given to the Trustee during such specified period by the Securityholders of a majority of the Percentage Interests represented by certain specified classes of Securities. No one or more Securityholders will have any right in any manner whatever by virtue of, or by availing themselves of, any provision of the Pooling and Servicing Agreement to affect, disturb or prejudice the rights of any other Securityholder of the same class or to obtain or to seek to obtain priority or preference over any other Securityholder of the same class or to enforce any right under the Pooling and Servicing Agreement, except in the manner provided in the Pooling and Servicing Agreement and for the equal and ratable benefit of all of the Securityholders of the same class. In the event the Trustee receives conflicting or inconsistent requests and indemnity from two or more groups of Securityholders, each representing less than a majority of the applicable class of Securities, the Trustee in its 60 sole discretion may determine what action, if any, shall be taken, notwithstanding any other provision of the Pooling and Servicing Agreement. Notwithstanding any other provision in the Pooling and Servicing Agreement, the Securityholder of any Security has the right, which is absolute and unconditional, to receive distributions to the extent provided in the Pooling and Servicing Agreement with respect to such Security or to institute suit for the enforcement of any such distribution, and such right shall not be impaired without the consent of such Security. Either (i) the Securityholders of a majority of the Percentage Interests represented by certain specified classes of Securities then outstanding or (ii) if there is a Credit Enhancer, such Credit Enhancer may direct the time, method and place of conducting any proceeding for any remedy available to the Sponsor with respect to the Certificates or exercising any trust or power conferred on the Trustee with respect to such Certificates; provided that: (1) such direction shall not be in conflict with any rule of law or with a Pooling and Servicing Agreement; (2) the Sponsor or the Trustee, as the case may be, shall have been provided with indemnity satisfactory to them; and (3) the Sponsor or the Trustee, as the case may be, may take any other action deemed proper by the Trustee which is not inconsistent with such direction; provided, however, that the Sponsor or the Trustee, as the case may be, need not take any action which they determine might involve them in liability or may be unjustly prejudicial to the Securityholders not so directing. The Trustee will be liable under the Pooling and Servicing Agreement only to the extent of the obligations specifically imposed upon and undertaken by the Trustee therein. Neither the Trustee nor any of the directors, officers, employees or agents of the Trustee will be under any liability on any Security or otherwise to any Account, the Sponsor, the Master Servicer or any Securityholder for any action taken or for refraining from the taking of any action in good faith under a Pooling and Servicing Agreement, or for errors in judgment; provided, however, that such provision shall not protect the Trustee or any such person against any liability which would otherwise be imposed by reason of negligent action, negligent failure to act or willful misconduct in the performance of duties or by reason of reckless disregard of obligations and duties thereunder. 61 YIELD CONSIDERATIONS The yield to maturity of a Security will depend on the price paid by the holder for such Security, the Pass-Through Rate on any such Security entitled to payments of interest (which Pass-Through Rate may vary if so specified in the related Prospectus Supplement) and the rate of payment of principal on such Security (or the rate at which the notional amount thereof is reduced if such Security is not entitled to payments of principal) and other factors. Each month the interest payable on an actuarial type of Mortgage Loan will be calculated as one-twelfth of the applicable Mortgage Rate multiplied by the principal balance of such Mortgage Loan outstanding as of a specified day, usually the first day of the month prior to the month in which the Payment Date for the related series of Securities occurs, after giving effect to the payment of principal due on such day, subject to any Deferred Interest. With respect to date of payment Mortgage Loans, interest is charged to the Mortgagor at the Mortgage Rate on the outstanding principal balance of such Note and calculated based on the number of days elapsed between receipt of the Mortgagor's last payment through receipt of the Mortgagor's most current payments. The amount of such payments with respect to each Mortgage Loan distributed (or accrued in the case of Deferred Interest or Accrual Securities) either monthly, quarterly or semi-annually to holders of a class of Securities entitled to payments of interest will be similarly calculated on the basis of such class' specified percentage of each such payment of interest (or accrual in the case of Accrual Securities) and will be expressed as a fixed, adjustable or variable Pass-Through Rate payable on the outstanding principal balance or notional amount of such Security, calculated as described herein and in the related Prospectus Supplement. Holders of Strip Securities or a class of Securities having a fixed Pass-Through Rate that varies based on the weighted average Mortgage Rate of the underlying Mortgage Loans will be affected by disproportionate prepayments and repurchases of Mortgage Loans having higher Net Mortgage Rates or rates applicable to the Strip Securities, as applicable. The effective yield to maturity to each holder of fixed-rate Securities entitled to payments of interest will be below that otherwise produced by the applicable Pass-Through Rate and purchase price of such Security because, while interest will accrue on each Mortgage Loan from the first day of each month, the distribution of such interest will be made on the 25th day (or, if such day is not a business day, the next succeeding business day) of the month (or, in the case of quarterly-pay Securities, the twenty-fifth day of every third month, or, in the case of semi-annual-pay Securities, the twenty-fifth day of every sixth month) following the month of accrual. A class of Securities may be entitled to payments of interest at a fixed Pass-Through Rate specified in the related Prospectus Supplement, a variable Pass-Through Rate or adjustable Pass-Through Rate calculated based on the weighted average of the Mortgage Rates (net of Servicing Fees and any Originator's Retained Yield (each, a 'Net Mortgage Rate')) of the related Mortgage Loans for the designated periods preceding the Payment Date if so specified in the related Prospectus Supplement, or at such other variable rate as may be specified in the related Prospectus Supplement. As will be described in the related Prospectus Supplement, the aggregate payments of interest on a class of Securities, and the yield to maturity thereon, will be effected by the rate of payment of principal on the Securities (or the rate of reduction in the notional balance of Securities entitled only to payments of interest) and, in the case of Securities evidencing interests in ARM Loans, by changes in the Net Mortgage Rates on the ARM Loans. See 'Maturity and Prepayment Considerations' below. The yield on the Securities also will be effected by liquidations of Mortgage Loans following Mortgagor defaults and by purchases of Mortgage Loans required by the Pooling and Servicing Agreement in the event of breaches of representations made in respect of such Mortgage Loans by the Sponsor, the Originators, the Master Servicer and others, or repurchases due to conversions of ARM Loans to a fixed interest rate. See 'Mortgage Loan Program--Representations by Originators' and 'Descriptions of the Securities--Assignment of Mortgage Loans' above. In general, if a class of Securities is purchased at initial issuance at a premium and payments of principal on the related Mortgage Loans occur at a rate faster than anticipated at the time of purchase, the purchaser's actual yield to maturity will be lower than that assumed at the time of purchase. Conversely, if a class of Securities is purchased at initial issuance at a discount and payments of principal on the related Mortgage Loans occur at a rate slower than that assumed at the time of purchase, the purchaser's actual yield to maturity will be lower than that originally anticipated. The effect of principal prepayments, liquidations and purchases on yield will be particularly 62 significant in the case of a series of Securities having a class entitled to payments of interest only or to payments of interest that are disproportionately high relative to the principal payments to which such class is entitled. Such a class likely will be sold at a substantial premium to its principal balance, if any, and any faster than anticipated rate of prepayments will adversely affect the yield to holders thereof. In certain circumstances, rapid prepayments may result in the failure of such holders to recoup their original investment. In addition, the yield to maturity on certain other types of classes of Securities, including Accrual Securities or certain other classes in a series including more than one class of Securities, may be relatively more sensitive to the rate of prepayment on the related Mortgage Loans than other classes of Securities. The timing of changes in the rate of principal payments on or repurchases of the Mortgage Loans may significantly affect an investor's actual yield to maturity, even if the average rate of principal payments experienced over time is consistent with an investor's expectation. In general, the earlier a prepayment of principal on the underlying Mortgage Loans or a repurchase thereof, the greater will be the effect on an investor's yield to maturity. As a result, the effect on an investor's yield of principal payments and repurchases occurring at a rate higher (or lower) than the rate anticipated by the investor during the period immediately following the issuance of a series of Securities would not be fully offset by a subsequent like reduction (or increase) in the rate of principal payments. The Mortgage Rates on certain ARM Loans subject to negative amortization adjust monthly and their amortization schedules adjust less frequently. During a period of rising interest rates as well as immediately after origination (initial Mortgage Rates are generally lower than the sum of the Indices applicable at origination and the related Note Margins) the amount of interest accruing on the principal balance of such Mortgage Loans may exceed the amount of the minimum scheduled monthly payment thereon. As a result, a portion of the accrued interest on negatively amortizing Mortgage Loans may become Deferred Interest that will be added to the principal balance thereof and will bear interest at the applicable Mortgage Rate. The addition of any such Deferred Interest to the principal balance will lengthen the weighted average life of the Securities evidencing interests in such Mortgage Loans and may adversely affect yield to holders thereof depending upon the price at which such Securities were purchased. In addition, with respect to certain ARM Loans subject to negative amortization, during a period of declining interest rates, it might be expected that each minimum scheduled monthly payment on such a Mortgage Loan would exceed the amount of scheduled principal and accrued interest on the principal balance thereof, and since such excess will be applied to reduce such principal balance, the weighted average life of such Securities will be reduced and may adversely affect yield to holders thereof depending upon the price at which such Securities were purchased. For each Mortgage Pool, if all necessary advances are made and if there is no unrecoverable loss on any Mortgage Loan and if the related Credit Enhancer is not in default under its obligations or other Credit Enhancement has not been exhausted, the net effect of each distribution respecting interest will be to pass-through to each holder of a class of Securities entitled to payments of interest an amount which is equal to one month's interest (or, in the case of quarterly-pay Securities, three month's interest or, in the case of semi- annually-pay Securities, six months' interest) at the applicable Pass-Through Rate on such class' principal balance or notional balance, as adjusted downward to reflect any decrease in interest caused by any principal prepayments and the addition of any Deferred Interest to the principal balance of any Mortgage Loan. 'Description of the Securities--Principal and Interest on the Securities.' With respect to certain of the ARM Loans, the Mortgage Rate at origination may be below the rate that would result if the index and margin relating thereto were applied at origination. Under the Sponsor's underwriting standards, the Mortgagor under each Mortgage Loan will be qualified on the basis of the Mortgage Rate in effect at origination. The repayment of any such Mortgage Loan may thus be dependent on the ability of the Mortgagor to make larger level monthly payments following the adjustment of the Mortgage Rate. MATURITY AND PREPAYMENT CONSIDERATIONS As indicated above under 'The Mortgage Pools,' the original terms to maturity of the Mortgage Loans in a given Mortgage Pool will vary depending upon the type of Mortgage Loans included in such Mortgage Pool. The Prospectus Supplement for a series of Securities will contain information with respect to the types and maturities of the Mortgage Loans in the related Mortgage Pool. Unless otherwise specified in the related Prospectus 63 Supplement, all of the Mortgage Loans may be prepaid without penalty in full or in part at any time. The prepayment experience with respect to the Mortgage Loans in a Mortgage Pool will affect the maturity, average life and yield of the related series of Securities. With respect to Balloon Loans, payment of the Balloon Amount (which, based on the amortization schedule of such Mortgage Loans, may be a substantial amount) will generally depend on the Mortgagor's ability to obtain refinancing of such Mortgage Loan or to sell the Mortgaged Property prior to the maturity of the Balloon Loan. The ability to obtain refinancing will depend on a number of factors prevailing at the time refinancing or sale is required, including, without limitation, real estate values, the Mortgagor's financial situation, prevailing mortgage loan interest rates, the Mortgagor's equity in the related Mortgaged Property, tax laws and prevailing general economic conditions. Unless otherwise specified in the related Prospectus Supplement, neither the Sponsor, the Master Servicer, nor any of their affiliates will be obligated to refinance or repurchase any Mortgage Loan or to sell the Mortgaged Property. A number of factors, including homeowner mobility, economic conditions, enforceability of due-on-sale clauses, mortgage market interest rates and the availability of mortgage funds, affect prepayment experience. Unless otherwise specified in the related Prospectus Supplement, the Mortgage Loans will generally contain due-on-sale provisions permitting the mortgagee to accelerate the maturity of the Mortgage Loan upon sale or certain transfers by the Mortgagor of the underlying Mortgaged Property. Unless the related Prospectus Supplement indicates otherwise, the Master Servicer will generally enforce any due-on-sale clause to the extent it has knowledge of the conveyance or proposed conveyance of the underlying Mortgaged Property and it is entitled to do so under applicable law; provided, however, that the Master Servicer will not take any action in relation to the enforcement of any due-on-sale provision which would adversely affect or jeopardize coverage under any applicable insurance policy. Certain ARM Loans may be assumable under certain conditions if the proposed transferee of the related Mortgaged Property establishes its ability to repay the Mortgage Loan and, in the reasonable judgment of the Master Servicer or the related Sub-Servicer, the security for the ARM Loan would not be impaired or might be improved by the assumption. The extent to which ARM Loans are assumed by purchasers of the Mortgaged Properties rather than prepaid by the related Mortgagors in connection with the sales of the Mortgaged Properties will affect the weighted average life of the related series of Securities. See 'Description of the Securities--Collection and Other Servicing Procedures' and 'Certain Legal Aspects of the Mortgage Loans and Related Matters--Enforceability of Certain Provisions' for a description of certain provisions of the Pooling and Servicing Agreement and certain legal developments that may affect the prepayment experience on the Mortgage Loans. There can be no assurance as to the rate of prepayment of the Mortgage Loans. The Sponsor is not aware of any reliable, publicly available statistics relating to the principal prepayment experience of diverse portfolios of mortgage loans such as the Mortgage Loans over an extended period of time. All statistics known to the Sponsor that have been compiled with respect to prepayment experience on mortgage loans indicates that while some mortgage loans may remain outstanding until their stated maturities, a substantial number will be paid prior to their respective stated maturities. Although the Mortgage Rates on ARM Loans will be subject to periodic adjustments, such adjustments will, unless otherwise specified in the related Prospectus Supplement, (i) not increase or decrease such Mortgage Rates by more than a fixed percentage amount on each adjustment date, (ii) not increase such Mortgage Rates over a fixed percentage amount during the life of any ARM Loan and (iii) be based on an index (which may not rise and fall consistently with mortgage interest rates) plus the related Note Margin (which may be different from margins being used at the time for newly originated adjustable rate mortgage loans). As a result, the Mortgage Rates on the ARM Loans in a Mortgage Pool at any time may not equal the prevailing rates for similar, newly originated adjustable rate mortgage loans. In certain rate environments, the prevailing rates on fixed-rate mortgage loans may be sufficiently low in relation to the then-current Mortgage Rates on ARM Loans that the rate of prepayment may increase as a result of refinancings. There can be no certainty as to the rate of prepayments on the Mortgage Loans during any period or over the life of any series of Securities. As may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of the principal collected on or with respect to the related Mortgage Loans may be applied by the related Trustee to the acquisition of additional Mortgage Loans during a specified period (rather 64 than used to fund payments of principal to Securityholders during such period) with the result that the related securities possess an interest-only period, also commonly referred to as a revolving period, which will be followed by an amortization period. Any such interest-only or revolving period may, upon the occurrence of certain events to be described in the related Prospectus Supplement, terminate prior to the end of the specified period and result in the earlier than expected amortization of the related Securities. In addition, and as may be described in the related Prospectus Supplement, the related Pooling and Servicing Agreement may provide that all or a portion of such collected principal may be retained by the Trustee (and held in certain temporary investments, including Mortgage Loans) for a specified period prior to being used to fund payments of principal to Securityholders. The result of such retention and temporary investment by the Trustee of such principal would be to slow the amortization rate of the related Securities relative to the amortization rate of the related Mortgage Loans, or to attempt to match the amortization rate of the related Securities to an amortization schedule established at the time such Securities are issued. Any such feature applicable to any Securities may terminate upon the occurrence of events to be described in the related Prospectus Supplement, resulting in the current funding of principal payments to the related Securityholders and an acceleration of the amortization of such Securities. Under certain circumstances, the Master Servicer, the Sponsor or, if specified in the related Prospectus Supplement, the holders of the REMIC Residual Securities or the Credit Enhancer may have the option to purchase the Mortgage Loans in a Trust Estate. See 'The Pooling and Servicing Agreement--Termination; Retirement of Securities.' CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS AND RELATED MATTERS The following discussion contains summaries of certain legal aspects of mortgage loans that are general in nature. Because such legal aspects are governed in part by applicable state law (which laws may differ substantially), the summaries do not purport to be complete nor to reflect the laws of any particular state nor to encompass the laws of all states in which the Mortgaged Properties may be situated. The summaries are qualified in their entirety by reference to the applicable federal and state laws governing the Mortgage Loans. GENERAL The Mortgage Loans will be secured by either deeds of trust or mortgages, depending upon the prevailing practice in the state in which the Mortgaged Property subject to a Mortgage Loan is located. In some states, a mortgage creates a lien upon the real property encumbered by the mortgage. In other states, the mortgage conveys legal title to the property to the mortgagee subject to a condition subsequent (i.e., the payment of the indebtedness secured thereby). The mortgage is not prior to the lien for real estate taxes and assessments and other charges imposed under governmental police powers. Priority between mortgages depends on their terms in some cases or on the terms of separate subordination or intercreditor agreements, and generally on the order of recordation of the mortgage in the appropriate recording office. There are two parties to a mortgage, the mortgagor, who is the borrower and homeowner, and the mortgagee, who is the lender. Under the mortgage instrument, the mortgagor delivers to the mortgagee a note or bond and the mortgage. In the case of a land trust, there are three parties because title to the property is held by a land trustee under a land trust agreement of which the borrower is the beneficiary; at origination of a mortgage loan, the borrower executes a separate undertaking to make payments on the mortgage note. Although a deed of trust is similar to a mortgage, a deed of trust has three parties; the borrower-homeowner called the trustor (similar to a mortgagor), a lender (similar to a mortgagee) called the beneficiary, and a third-party grantee called the trustee. Under a deed of trust, the borrower grants the property, irrevocably until the debt is paid, in trust, generally with a power of sale, to the trustee to secure payment of the obligation. The trustee's authority under a deed of trust and the mortgagee's authority under a mortgage are governed by law, the express provisions of the deed of trust or mortgage, and, in some cases, the directions of the beneficiary. 65 COOPERATIVE LOANS If specified in the Prospectus Supplement relating to a series of Securities, the Mortgage Loans also may consist of Cooperative Loans evidenced by Cooperative Notes secured by security interests in shares issued by cooperatives, which are private corporations that are entitled to be treated as housing cooperatives under federal tax law, and in the related proprietary leases or occupancy agreements granting exclusive rights to occupy specific dwelling units in the cooperatives' buildings. The security agreement will create a lien upon, or grant a title interest in, the property which it covers, the priority of which will depend on the terms of the particular security agreement as well as the order of recordation of the agreement in the appropriate recording office. Such a lien or title interest is not prior to the lien for real estate taxes and assessments and other charges imposed under governmental police powers. Each cooperative owns in fee or has a leasehold interest in all the real property and owns in fee or leases the building and all separate dwelling units therein. The cooperative is directly responsible for property management and, in most cases, payment of real estate taxes, other governmental impositions and hazard and liability insurance. If there is a blanket mortgage or mortgages on the cooperative apartment building or underlying land, as is generally the case, or an underlying lease of the land, as is the case in some instances, the cooperative, as property mortgagor, or lessee, as the case may be, also is responsible for meeting these mortgage or rental obligations. A blanket mortgage is ordinarily incurred by the cooperative in connection with either the construction or purchase of the cooperative's apartment building or the obtaining of capital by the cooperative. The interest of the occupant under proprietary leases or occupancy agreements as to which that cooperative is the landlord generally is subordinate to the interest of the holder of a blanket mortgage and to the interest of the holder of a land lease. If the cooperative is unable to meet the payment obligations (i) arising under a blanket mortgage, the mortgagee holding a blanket mortgage could foreclose on that mortgage and terminate all subordinate proprietary leases and occupancy agreements or (ii) arising under its land lease, the holder of the landlord's interest under the land lease could terminate it and all subordinate proprietary leases and occupancy agreements. Also, a blanket mortgage on a cooperative may provide financing in the form of a mortgage that does not fully amortize, with a significant portion of principal being due in one final payment at maturity. The inability of the cooperative to refinance a mortgage and its consequent inability to make such final payment could lead to foreclosure by the mortgagee. Similarly, a land lease has an expiration date and the inability of the cooperative to extend its term or, in the alternative, to purchase the land could lead to termination of the cooperative's interest in the property and termination of all proprietary leases and occupancy agreements. In either event, a foreclosure by the holder of a blanket mortgage or the termination of the underlying lease could eliminate or significantly diminish the value of any collateral held by the lender who financed the purchase by an individual tenant-stockholder of cooperative shares or, in the case of the Mortgage Loans, the collateral securing the Cooperative Loans. The cooperative is owned by tenant-stockholders who, through ownership of stock or shares in the corporation, receive proprietary leases or occupancy agreements that confer exclusive rights to occupy specific units. Generally, a tenant-stockholder of a cooperative must make a monthly payment to the cooperative representing such tenant-stockholder's pro rata share of the cooperative's payments for its blanket mortgage, real property taxes, maintenance expenses and other capital or ordinary expenses. An ownership interest in a cooperative and accompanying occupancy rights are financed through a cooperative share loan evidenced by a promissory note and secured by an assignment of and a security interest in the occupancy agreement or proprietary lease and a security interest in the related cooperative shares. The lender generally takes possession of the share certificate and a counterpart of the proprietary lease or occupancy agreement and a financing statement covering the proprietary lease or occupancy agreement and the cooperative shares is filed in the appropriate state and local offices to perfect the lender's interest in its collateral. Subject to the limitations discussed below, upon default of the tenant-stockholder, the lender may sue for judgment on the promissory note, dispose of the collateral at a public or private sale or otherwise proceed against the collateral or tenant-stockholder as an individual as provided in the security agreement covering the assignment of the proprietary lease or occupancy agreement and the pledge of cooperative shares. See 'Foreclosure on Shares of Cooperatives' below. 66 FORECLOSURE Foreclosure of a deed of trust is generally accomplished by a non-judicial trustee's sale (private sale) under a specific provision in the deed of trust and state laws which authorize the trustee to sell the property upon any default by the borrower under the terms of the note or deed of trust. Beside the nonjudicial remedy, a deed of trust may be judicially foreclosed. In addition to any notice requirements contained in a deed of trust, in some states, the trustee must record a notice of default and within a certain period of time send a copy to the borrower trustor and to any person who has recorded a request for a copy of notice of default and notice of sale. In addition, the trustee must provide notice in some states to any other individual having an interest of record in the real property, including any junior lienholders. If the deed of trust is not reinstated within a specified period, a notice of sale must be posted in a public place and, in most states, published for a specific period of time in one or more local newspapers. In addition, some state laws require that a copy of the notice of sale be posted on the property and sent to all parties having an interest of record in the real property. Foreclosure of a mortgage is generally accomplished by judicial action. Generally, the action is initiated by the service of legal pleadings upon all parties having an interest of record in the real property. Delays in completion of the foreclosure may occasionally result from difficulties in locating necessary parties. Judicial foreclosure proceedings are often not contested by any of the applicable parties. If the mortgagee's right to foreclose is contested, the legal proceedings necessary to resolve the issue can be time-consuming. In some states, the borrower-trustor has the right to reinstate the loan at any time following default until shortly before the trustee's sale. In general, in such states, the borrower, or any other person having a junior encumbrance on the real estate, may, during a reinstatement period, cure the default by paying the entire amount in arrears plus the costs and expenses incurred in enforcing the obligation. In the case of foreclosure under either a mortgage or a deed of trust, the sale by the referee or other designated officer or by the trustee is a public sale. However, because of the difficulty a potential buyer at the sale would have in determining the exact status of title and because the physical condition of the property may have deteriorated during the foreclosure proceedings, it is uncommon for a third party to purchase the property at a foreclosure sale unless there is a great deal of economic incentive for the new purchaser to purchase the subject property at the sale. Rather, it is common for the lender to purchase the property from the trustee or referee for a credit bid less than or equal to the unpaid principal amount of the mortgage or deed of trust, accrued and unpaid interest and the expense of foreclosure. Generally, state law controls the amount of foreclosure costs and expenses, including attorneys' fees, which may be recovered by a lender. Thereafter, subject to the right of the borrower in some states to remain in possession during the redemption period, the lender will assume the burdens of ownership, including obtaining hazard insurance and making such repairs at its own expense as are necessary to render the property suitable for sale. The lender will commonly obtain the services of a real estate broker and pay the broker's commission in connection with the sale of the property. Depending upon market conditions, the ultimate proceeds of the sale of the property may not equal the lender's investment in the property and, in some states, the lender may be entitled to a deficiency judgment. Any loss may be reduced by the receipt of any mortgage insurance proceeds. FORECLOSURE ON SHARES OF COOPERATIVES The cooperative shares and proprietary lease or occupancy agreement owned by the tenant-stockholder and pledged to the lender are, in almost all cases, subject to restrictions on transfer as set forth in the cooperative's certificate of incorporation and by-laws, as well as in the proprietary lease or occupancy agreement. The proprietary lease or occupancy agreement, even while pledged, may be cancelled by the cooperative for failure by the tenant stockholder to pay rent or other obligations or charges owed by such tenant-stockholder, including mechanics' liens against the cooperative apartment building incurred by such tenant-stockholder. Commonly, rent and other obligations and charges arising under a proprietary lease or occupancy agreement that are owed to the cooperative are made liens upon the shares to which the proprietary lease or occupancy agreement relates. In addition, the proprietary lease or occupancy agreement generally permits the cooperative to terminate such lease or agreement in the event the borrower defaults in the performance of covenants thereunder. Typically, the lender and the cooperative enter into a recognition agreement that, together with any lender protection provisions contained in the proprietary lease, establishes the rights and obligations of both parties in the event of a default by 67 the tenant-stockholder on its obligations under the proprietary lease or occupancy agreement. A default by the tenant-stockholder under the proprietary lease or occupancy agreement usually will constitute a default under the security agreement between the lender and the tenant-stockholder. The recognition agreement generally provides that, in the event that the tenant-stockholder has defaulted under the proprietary lease or occupancy agreement, the cooperative will take no action to terminate such lease or agreement until the lender has been provided with notice of and an opportunity to cure the default. The recognition agreement typically provides that if the proprietary lease or occupancy agreement is terminated, the cooperative will recognize the lender's lien against proceeds from a sale of the cooperative apartment, subject, however, to the cooperative's right to sums due under such proprietary lease or occupancy agreement or sums that have become liens on the shares relating to the proprietary lease or occupancy agreement. The total amount owed to the cooperative by the tenant-stockholder, which the lender generally cannot restrict and does not monitor, could reduce the amount realized upon a sale of the collateral below the outstanding principal balance of the Cooperative Loan and accrued and unpaid interest thereon. Recognition agreements generally also provide that in the event of a foreclosure on a Cooperative Loan, the lender must obtain the approval or consent of the cooperative as required by the proprietary lease before transferring the cooperative shares or assigning the proprietary lease. Generally, the lender is not limited in any rights it may have to dispossess the tenant-stockholder. In New York, foreclosure on the cooperative shares is accomplished by public sale in accordance with the provisions of Article 9 of the UCC and the security agreement relating to those shares. Article 9 of the UCC requires that a sale be conducted in a 'commercially reasonable' manner. Whether a sale has been conducted in a 'commercially reasonable' manner will depend on the facts in each case. In determining commercial reasonableness, a court will look to the notice given the debtor and the method, manner, time, place and terms of the sale and the sale price. Generally, a sale conducted according to the usual practice of banks selling similar collateral will be considered reasonably conducted. Article 9 of the UCC provides that the proceeds of the sale will be applied first to pay the costs and expenses of the sale and then to satisfy the indebtedness secured by the lender's security interest. The recognition agreement, however, generally provides that the lender's right to reimbursement is subject to the right of the cooperative corporation to receive sums due under the proprietary lease or occupancy agreement. If there are proceeds remaining, the lender must account to the tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness remains unpaid, the tenant-stockholder is generally responsible for the deficiency. See 'Anti-Deficiency Legislation and Other Limitations on Lenders' below. RIGHTS OF REDEMPTION In some states, after sale pursuant to a deed of trust or foreclosure of a mortgage, the borrower and foreclosed junior lienors or other parties are given a statutory period in which to redeem the property from the foreclosure sale. In some states, redemption may occur only upon payment of the entire principal balance of the loan, accrued interest and expenses of foreclosure. In other states, redemption may be authorized if the former borrower pays only a portion of the sums due. The effect of a statutory right of redemption is to diminish the ability of the lender to sell the foreclosed property. The rights of redemption would defeat the title of any purchaser subsequent to foreclosure or sale under a deed of trust. Consequently, the practical effect of the redemption right is to force the lender to maintain the property and pay the expenses of ownership until the redemption period has expired. In some states, there is no right to redeem property after a trustee's sale under a deed of trust. ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS Certain states have imposed statutory prohibitions that limit the remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some states, including California, statutes limit the right of the beneficiary or mortgagee to obtain a deficiency judgment against the borrower following foreclosure. A deficiency judgment is a personal judgment against the former borrower equal in most cases to the difference between the amount due to the lender and the net amount realized upon the public sale of the real property. In the case of a Mortgage Loan secured by a property owned by a trust where the Mortgage Note is executed on behalf of the trust, a deficiency judgment against the trust following foreclosure or sale under a deed of trust, even if 68 obtainable under applicable law, may be of little value to the mortgagee or beneficiary if there are no trust assets against which such deficiency judgment may be executed. Other statutes require the beneficiary or mortgagee to exhaust the security af forded under a deed of trust or mortgage by foreclosure in an attempt to satisfy the full debt before bringing a personal action against the borrower. In certain other states, the lender has the option of bringing a personal action against the borrower on the debt without first exhausting such security; however, in some of these states the lender, following judgment on such personal action, may be deemed to have elected a remedy and may be precluded from exercising remedies with respect to the security. Consequently, the practical effect of the election requirement, in those states permitting such election, is that lenders will usually proceed against the security first rather than bringing a personal action against the borrower. Finally, in certain other states, statutory provisions limit any deficiency judgment against the former borrower following a foreclosure to the excess of the outstanding debt over the fair value of the property at the time of the public sale. The purpose of these statutes is generally to prevent a beneficiary or mortgagee from obtaining a large deficiency judgment against the former borrower as a result of low or no bids at the judicial sale. In addition to laws limiting or prohibiting deficiency judgments, numerous other federal and state statutory provisions, including the federal bankruptcy laws and state laws affording relief to debtors, may interfere with or affect the ability of the secured mortgage lender to realize upon collateral or enforce a deficiency judgment. For example, with respect to federal bankruptcy law, a court with federal bankruptcy jurisdiction may permit a debtor through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a mortgage loan on a debtor's residence by paying arrearages within a reasonable time period and reinstating the original mortgage loan payment schedule even though the lender accelerated the mortgage loan and final judgment of foreclosure had been entered in state court (provided no sale of the residence had yet occurred) prior to the filing of the debtor's petition. Some courts with federal bankruptcy jurisdiction have approved plans, based on the particular facts of the reorganization case, that effected the curing of a mortgage loan default by paying arrearages over a number of years. Courts with federal bankruptcy jurisdiction also have indicated that the terms of a mortgage loan secured by property of the debtor may be modified. These courts have allowed modifications that include reducing the amount of each monthly payment, changing the rate of interest, altering the repayment schedule, forgiving all or a portion of the debt and reducing the lender's security interest to the value of the residence, thus leaving the lender a general unsecured creditor for the difference between the value of the residence and the outstanding balance of the loan. Certain states have imposed general equitable principles upon judicial foreclosure. These equitable principles are generally designed to relieve the borrower from the legal effect of the borrower's default under the related loan documents. Examples of judicial remedies that have been fashioned include judicial requirements that the lender undertake affirmative and expensive actions to determine the causes for the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, lenders have been required to reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from temporary financial disabilities. In other cases, such courts have limited the right of the lender to foreclose if the default under the loan is not monetary, such as the borrower failing to adequately maintain the property or the borrower executing a second deed of trust affecting the property. Certain tax liens arising under the Internal Revenue Code of 1986, as amended, may in certain circumstances provide priority over the lien of a mortgage or deed of trust. In addition, substantive requirements are imposed upon mortgage lenders in connection with the origination and the servicing of mortgage loans by numerous federal and some state consumer protection laws. These laws include, by example, the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act and related statutes and the California Fair Debt Collection Practices Act. These laws and regulations impose specific statutory liabilities upon lenders who originate mortgage loans and fail to comply with the provisions of the law. In some cases, this liability may affect assignees of the mortgage loans. ENVIRONMENTAL LEGISLATION Certain states impose a statutory lien for associated costs on property that is the subject of a cleanup action by the state on account of hazardous wastes or hazardous substances released or disposed of on the property. Such a lien generally will have priority over all subsequent liens on the property and, in certain of these states, will have priority over prior recorded liens including the lien of a mortgage. In some states, however, such a lien 69 will not have priority over prior recorded liens of a deed of trust. In addition, under federal environmental legislation and under state law in a number of states, a secured party which takes a deed in lieu of foreclosure or acquires a mortgaged property at a foreclosure sale or assumes active control over the operation or management of a property so as to be deemed an 'owner' or 'operator' of the property may be liable for the costs of cleaning up a contaminated site. Although such costs could be substantial, it is unclear whether they would be imposed on a lender (such as a Trust Estate) secured by residential real property. In the event that title to a Mortgaged Property securing a Mortgage Loan in a Trust Estate was acquired by the Trust and cleanup costs were incurred in respect of the Mortgaged Property, the holders of the related series of Securities might realize a loss if such costs were required to be paid by the Trust. ENFORCEABILITY OF CERTAIN PROVISIONS Unless the Prospectus Supplement indicates otherwise, generally all of the Mortgage Loans contain due-on-sale clauses. These clauses permit the lender to accelerate the maturity of the loan if the borrower sells, transfers or conveys the property. The enforceability of these clauses has been the subject of legislation or litigation in many states including California, and in some cases the enforceability of these clauses was limited or denied. However, the Garn-St. Germain Depository Institutions Act of 1982 (the 'Garn-St. Germain Act') preempts state constitutional, statutory and case law that prohibits the enforcement of due-on-sale clauses and permits lenders to enforce these clauses in accordance with their terms, subject to certain limited exceptions. The Garn-St. Germain Act does 'encourage' lenders to permit assumption of loans at the original rate of interest or at some other rate less than the average of the original rate and the market rate. The Garn-St. Germain Act also sets forth nine specific instances in which a mortgage lender covered by the Garn-St. Germain Act may not exercise a due-on-sale clause, notwithstanding the fact that a transfer of the property may have occurred. These include intra-family transfers, certain transfers by operation of law, leases of fewer than three years and the creation of a junior encumbrance. Regulations promulgated under the Garn-St. Germain Act also prohibit the imposition of a prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale clause. The inability to enforce a due-on-sale clause may result in a mortgage loan bearing an interest rate below the current market rate being assumed by a new home buyer rather than being paid off, that may have an impact upon the average life of the Mortgage Loans and the number of Mortgage Loans that may be outstanding until maturity. Upon foreclosure, courts have imposed general equitable principles. These equitable principles generally are designed to relieve the borrower from the legal effect of his defaults under the loan documents. Examples of judicial remedies that have been fashioned include judicial requirements that the lender undertake affirmative and expensive actions to determine the causes for the borrower's default and the likelihood that the borrower will be able to reinstate the loan. In some cases, courts have substituted their judgment for the lender's judgment and have required that lenders reinstate loans or recast payment schedules in order to accommodate borrowers who are suffering from temporary financial disability. In other cases, courts have limited the right of the lender to foreclose if the default under the mortgage instrument is not monetary, such as the borrower failing to adequately maintain the property or the borrower executing a second mortgage or deed of trust affecting the property. Finally, some courts have been faced with the issue of whether or not federal or state constitutional provisions reflecting due process concerns for adequate notice require that borrowers under deeds of trust or mortgages receive notices in addition to the statutorily prescribed minimum. For the most part, these cases have upheld the notice provisions as being reasonable or have found that the sale by a trustee under a deed of trust, or under a mortgage having a power of sale, does not involve sufficient state action to afford constitutional protections to the borrower. CERTAIN PROVISIONS OF CALIFORNIA DEEDS OF TRUST Most institutional lenders in California use a form of deed of trust that confers on the beneficiary the right both to receive all proceeds collected under any hazard insurance policy and all awards made in connection with any condemnation proceedings, and to apply such proceeds and awards to any indebtedness secured by the deed of trust, in such order as the beneficiary may determine, provided, however, that California law prohibits the beneficiary from applying insurance and condemnation proceeds to the indebtedness secured by the deed of trust unless the beneficiary's security has been impaired by the casualty or condemnation, and, if such security has 70 been impaired, permits such proceeds to be so applied only to the extent of such impairment. Thus, in the event improvements on the property are damaged or destroyed by fire or other casualty, or in the event the property is taken by condemnation, and, as a result thereof, the beneficiary's security is impaired, the beneficiary under the underlying first deed of trust will have the prior right to collect any insurance proceeds payable under a hazard insurance policy and any award of damages in connection with the condemnation and to apply the same to the indebtedness secured by the first deed of trust. Proceeds in excess of the amount of indebtedness secured by a first deed of trust will, in most cases, be applied to the indebtedness of a junior deed of trust. Another provision typically found in the forms of deed of trust used by most institutional lenders in California obligates the trustor to pay before delinquency all taxes and assessments on the property and, when due, all encumbrances, charges and liens on the property which appear prior to the deed of trust, to provide and maintain fire insurance on the property, to maintain and repair the property and not to commit or permit any waste thereof, and to appear in and defend any action or proceeding purporting to affect the property or the rights of the beneficiary under the deed of trust. Upon a failure of the trustor to perform any of these obligations, the beneficiary is given the right under the deed of trust to perform the obligation itself, at its election, with the trustor agreeing to reimburse the beneficiary for any sums expended by the beneficiary on behalf of the trustor. All sums so expended by the beneficiary become part of the indebtedness secured by the deed of trust. APPLICABILITY OF USURY LAWS Title V of the Depository Institutions Deregulation and Monetary Control Act of 1980, enacted in March 1980 ('Title V'), provides that state usury limitations shall not apply to certain types of residential first mortgage loans originated by certain lenders after March 31, 1980. A similar federal statute was in effect with respect to mortgage loans made during the first three months of 1980. The Office of Thrift Supervision is authorized to issue rules and regulations and to publish interpretations governing implementation of Title V. The statute authorized any state to reimpose interest rate limits by adopting, before April 1, 1983, a law or constitutional provision which expressly rejects application of the federal law. In addition, even where Title V is not so rejected, any state is authorized by the law to adopt a provision limiting discount points or other charges on mortgage loans covered by Title V. Certain states have taken action to reimpose interest rate limits or to limit discount points or other charges. As indicated above under 'Mortgage Loan Program--Representations by Originators,' each Originator of a Mortgage Loan will have represented that such Mortgage Loan was originated in compliance with then applicable state laws, including usury laws, in all material respects. However, the Mortgage Rates on the Mortgage Loans will be subject to applicable usury laws as in effect from time to time. ALTERNATIVE MORTGAGE INSTRUMENTS Alternative mortgage instruments, including ARM Loans and early ownership mortgage loans, originated by non-federally chartered lenders have historically been subjected to a variety of restrictions. Such restrictions differed from state to state, resulting in difficulties in determining whether a particular alternative mortgage instrument originated by a state-chartered lender was in compliance with applicable law. These difficulties were alleviated substantially as a result of the enactment of Title VIII of the Garn-St. Germain Act ('Title VIII'). Title VIII provides that: notwithstanding any state law to the contrary, state-chartered banks may originate alternative mortgage instruments in accordance with regulations promulgated by the Comptroller of the Currency with respect to origination of alternative mortgage instruments by national banks; state-chartered credit unions may originate alternative mortgage instruments in accordance with regulations promulgated by the National Credit Union Administration with respect to origination of alternative mortgage instruments by federal credit unions; and all other non-federally chartered housing creditors, including state-chartered savings and loan associations, state-chartered savings banks and mutual savings banks and mortgage banking companies, may originate alternative mortgage instruments in accordance with the regulations promulgated by the Federal Home Loan Bank Board, predecessor to the Office of Thrift Supervision, with respect to origination of alternative mortgage instruments by federal savings and loan associations. Title VIII provides that any state may reject applicability of the provisions of Title VIII by adopting, prior to October 15, 1985, a law or constitutional provision expressly rejecting the applicability of such provisions. Certain states have taken such action. 71 SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940 Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the 'Relief Act'), a Mortgagor who enters military service after the origination of such Mortgagor's Mortgage Loan (including a Mortgagor who was in reserve status and is called to active duty after origination of the Mortgage Loan), may not be charged interest (including fees and charges) above an annual rate of 6% during the period of such Mortgagor's active duty status, unless a court orders otherwise upon application of the lender. The Relief Act applies to Mortgagors who are members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast Guard, and officers of the U.S. Public Health Service assigned to duty with the military. Because the Relief Act applies to Mortgagors who enter military service (including reservists who are called to active duty) after origination of the related Mortgage Loan, no information can be provided as to the number of loans that may be affected by the Relief Act. Application of the Relief Act would adversely affect, for an indeterminate period of time, the ability of the Master Servicer to collect full amounts of interest on certain of the Mortgage Loans. Any shortfall in interest collections resulting from the application of the Relief Act or similar legislation or regulations, which would not be recoverable from the related Mortgage Loans, would result in a reduction of the amounts distributable to the holders of the related Securities, and would not be covered by advances, any Letter of Credit or any other form of Credit Enhancement provided in connection with the related series of Securities. In addition, the Relief Act imposes limitations that would impair the ability of the Master Servicer to foreclose on an affected Mortgage Loan during the Mortgagor's period of active duty status, and, under certain circumstances, during an additional three month period thereafter. Thus, in the event that the Relief Act or similar legislation or regulations apply to any Mortgage Loan which goes into default, there may be delays in payment and losses on the related Securities in connection therewith. Any other interest shortfalls, deferrals or forgiveness of payments on the Mortgage Loans resulting from similar legislation or regulations may result in delays in payments or losses to Securityholders of the related series. CERTAIN FEDERAL INCOME TAX CONSEQUENCES GENERAL The following is a general discussion of the material anticipated federal income tax consequences to investors of the purchase, ownership and disposition of the Securities offered hereby. The discussion is based upon laws, regulations, rulings and decisions now in effect, all of which are subject to change. The discussion below does not purport to deal with all federal tax consequences applicable to all categories of investors, some of which may be subject to special rules. Investors should consult their own tax advisors in determining the federal, state, local and any other tax consequences to them of the purchase, ownership and disposition of the Securities. The following discussion addresses securities of three general types: (i) securities ('Grantor Trust Securities') representing interests in a Trust Estate (a 'Grantor Trust Estate') which the Sponsor will covenant not to elect to have treated as a real estate mortgage investment conduit (REMIC); (ii) securities ('REMIC Securities') representing interests in a Trust Estate, or a portion thereof, which the Sponsor will covenant to elect to have treated as a REMIC under sections 860A through 860G of the Internal Revenue Code of 1986, as amended (the 'Code'); and (iii) securities ('Debt Securities') that are intended to be treated for federal income tax purposes as indebtedness secured by the underlying Mortgage Loans. This Prospectus does not address the tax treatment of partnership interests. Such a discussion will be set forth in the related Prospectus Supplement for any Trust issuing Securities characterized as partnership interests. The Prospectus Supplement for each series of Securities will indicate whether a REMIC election (or elections) will be made for the related Trust Estate and, if a REMIC election is to be made, will identify all 'regular interests' and 'residual interests' in the REMIC. For purposes of this discussion, references to a 'Securityholder' or a 'Holder' are to the beneficial owner of a Security. GRANTOR TRUST SECURITIES With respect to each series of Grantor Trust Securities, Dewey Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited in the related Prospectus Supplement) the related Grantor Trust Estate will be classified as a grantor trust and not as a partnership or an association taxable as a corporation. Accordingly, each Holder of a Grantor Trust Security will generally be treated as the owner of an interest in the Mortgage Loans included in the Grant or Trust Estate. 72 For purposes of the following discussion, a Grantor Trust Security representing an undivided equitable ownership interest in the principal of the Mortgage Loans constituting the related Grantor Trust Estate, together with interest thereon at a pass-through rate, will be referred to as a 'Grantor Trust Fractional Interest Security.' A Grantor Trust Security representing ownership of all or a portion of the difference between interest paid on the Mortgage Loans constituting the related Grantor Trust Estate and interest paid to the Holders of Grantor Trust Fractional Interest Securities issued with respect to such Grantor Trust Estate will be referred to as a 'Grantor Trust Strip Security.' Special Tax Attributes Unless otherwise disclosed in a related Prospectus Supplement, Dewey Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (a) Grantor Trust Fractional Interest Securities will represent interests in (i) 'qualifying real property loans' within the meaning of section 593(d) of the Code; (ii) 'loans . . . secured by an interest in real property' within the meaning of section 7701(a)(19)(C)(v) of the Code; and (iii) 'obligations (including any participation or certificate of beneficial ownership therein) which . . . are principally secured by an interest in real property' within the meaning of section 860G(a)(3)(A) of the Code; and (b) interest on Grantor Trust Fractional Interest Securities will be considered 'interest on obligations secured by mortgages on real property or on interests in real property' within the meaning of section 856(c)(3)(B) of the Code. In addition, the Grantor Trust Strip Securities will be 'obligations (including any participation or certificate of beneficial ownership therein) . . . principally secured by an interest in real property' within the meaning of section 860G(a)(3)(A) of the Code. Taxation of Holders of Grantor Trust Securities Holders of Grantor Trust Fractional Interest Securities generally will be required to report on their federal income tax returns their respective shares of the income from the Mortgage Loans (including amounts used to pay reasonable servicing fees and other expenses but excluding amounts payable to Holders of any corresponding Grantor Trust Strip Securities) and, subject to the limitations described below, will be entitled to deduct their shares of any such reasonable servicing fees and other expenses. If a Holder acquires a Grantor Trust Fractional Interest Security for an amount that differs from its outstanding principal amount, the amount includible in income on a Grantor Trust Fractional Interest Security may differ from the amount of interest distributable thereon. See 'Discount and Premium,' below. Individuals holding a Grantor Trust Fractional Interest Security directly or through certain pass-through entities will be allowed a deduction for such reasonable servicing fees and expenses only to the extent that the aggregate of such Holder's miscellaneous itemized deductions exceeds 2% of such Holder's adjusted gross income. Further, Holders (other than corporations) subject to the alternative minimum tax may not deduct miscellaneous itemized deductions in determining alternative minimum taxable income. Holders of Grantor Trust Strip Securities generally will be required to treat such Securities as 'stripped coupons' under section 1286 of the Code. Accordingly, such a Holder will be required to treat the excess of the total amount of payments on such a Security over the amount paid for such Security as original issue discount and to include such discount in income as it accrues over the life of such Security. See '--Discount and Premium,' below. Grantor Trust Fractional Interest Securities may also be subject to the coupon stripping rules if a class of Grantor Trust Strip Securities is issued as part of the same series of Securities. The consequences of the application of the coupon stripping rules would appear to be that any discount arising upon the purchase of such a Security (and perhaps all stated interest thereon) would be classified as original issue discount and includible in the Holder's income as it accrues (regardless of the Holder's method of accounting), as described below under '--Discount and Premium.' The coupon stripping rules will not apply, however, if (i) the pass-through rate is no more than 100 basis points lower than the gross rate of interest payable on the underlying Mortgage Loans and (ii) the difference between the outstanding principal balance on the Security and the amount paid for such Security is less than 0.25% of such principal balance times the weighted average remaining maturity of the Security. 73 Sales of Grantor Trust Securities Any gain or loss recognized on the sale of a Grantor Trust Security (equal to the difference between the amount realized on the sale and the adjusted basis of such Grantor Trust Security) will be capital gain or loss, except to the extent of accrued and unrecognized market discount, which will be treated as ordinary income, and in the case of banks and other financial institutions except as provided under section 582(c) of the Code. The adjusted basis of a Grantor Trust Security will generally equal its cost, increased by any income reported by the seller (including original issue discount and market discount income) and reduced (but not below zero) by any previously reported losses, any amortized premium and by any distributions of principal. Grantor Trust Reporting The Trustee will furnish to each Holder of a Grantor Trust Fractional Interest Security with each distribution a statement setting forth the amount of such distribution allocable to principal on the underlying Mortgage Loans and to interest thereon at the related Pass-Through Rate. In addition, within a reasonable time after the end of each calendar year, based on information provided by the Servicer, the Trustee will furnish to each Holder during such year such customary factual information as the Servic er deems necessary or desirable to enable Holders of Grantor Trust Securities to prepare their tax returns and will furnish comparable information to the Internal Revenue Service (the 'IRS') as and when required to do so by law. REMIC SECURITIES If provided in a related Prospectus Supplement, an election will be made to treat a Trust Estate as a REMIC under the Code. Qualification as a REMIC requires ongoing compliance with certain conditions. With respect to each series of Securities for which such an election is made, Dewey Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited in the related Prospectus Supplement), assuming compliance with the Pooling and Servicing Agreement, the Trust Estate will be treated as a REMIC for federal income tax purposes. A Trust Estate for which a REMIC election is made will be referred to herein as a 'REMIC Trust.' The Securities of each class will be designated as 'regular interests' in the REMIC Trust except that a separate class will be designated as the 'residual interest' in the REMIC Trust. The Prospectus Supplement for each series of Securities will state whether Securities of each class will constitute a regular interest (a REMIC Regular Security) or a residual interest (a REMIC Residual Security). A REMIC Trust will not be subject to federal income tax except with respect to income from prohibited transactions and in certain other instances described below. See '--Taxes on a REMIC Trust.' Generally, the total income from the Mortgage Loans in a REMIC Trust will be taxable to the Holders of the Securities of that series, as described below. Regulations issued by the Treasury Department on December 23, 1992 (the 'REMIC Regulations') provide some guidance regarding the federal income tax consequences associated with the purchase, ownership and disposition of REMIC Securities. While certain material provisions of the REMIC Regulations are discussed below, investors should consult their own tax advisors regarding the possible application of the REMIC Regulations in their specific circumstances. SPECIAL TAX ATTRIBUTES REMIC Regular Securities and REMIC Residual Securities will be 'regular or residual interests in a REMIC' within the meaning of section 7701(a)(19)(C)(xi) of the Code, 'qualifying real property loans' within the meaning of section 593(d) of the Code and 'real estate assets' within the meaning of section 856(c)(5)(A) of the Code. If at any time during a calendar year less than 95% of the assets of a REMIC Trust consist of 'qualified mortgages' (within the meaning of section 860G(a)(3) of the Code) then the portion of the REMIC Regular Securities and REMIC Residual Securities that are qualifying assets under those sections during such calendar year may be limited to the portion of the assets of such REMIC Trust that are qualified mortgages. Similarly, income on the REMIC Regular Securities and REMIC Residual Securities will be treated as 'interest on obligations secured by mortgages on real property' within the meaning of section 856(c)(3)(B) of the Code, subject to the same limitation as set forth in the preceding sentence. For purposes of applying this limitation, a REMIC Trust should be treated as owning the assets represented by the qualified mortgages. The assets of the 74 Trust Estate will include, in addition to the Mortgage Loans, payments on the Mortgage Loans held pending distribution on the REMIC Regular Securities and REMIC Residual Securities and any reinvestment income thereon. REMIC Regular Securities and REMIC Residual Securities held by a financial institution to which section 585, 586 or 593 of the Code applies will be treated as evidences of indebtedness for purposes of section 582(c)(1) of the Code. REMIC Regular Securities will also be qualified mortgages with respect to other REMICs. Taxation of Holders of REMIC Regular Securities Except as indicated below in this federal income tax discussion, the REMIC Regular Securities will be treated for federal income tax purposes as debt instruments issued by the REMIC Trust on the date such Securities are first sold to the public (the 'Settlement Date') and not as ownership interests in the REMIC Trust or its assets. Holders of REMIC Regular Securities that otherwise report income under a cash method of accounting will be required to report income with respect to such Securities under an ac crual method. For additional tax consequences relating to REMIC Regular Securities purchased at a discount or with premium, see '--Discount and Premium,' below. Taxation of Holders of REMIC Residual Securities Daily Portions. Except as indicated below, a Holder of a REMIC Residual Security for a REMIC Trust generally will be required to report its daily portion of the taxable income or net loss of the REMIC Trust for each day during a calendar quarter that the Holder owned such REMIC Residual Security. For this purpose, the daily portion shall be determined by allocating to each day in the calendar quarter its ratable portion of the taxable income or net loss of the REMIC Trust for such quarter and by allocating the amount so allocated among the Residual Holders (on such day) in accordance with their percentage interests on such day. Any amount included in the gross income or allowed as a loss of any Residual Holder by virtue of this paragraph will be treated as ordinary income or loss. The requirement that each Holder of a REMIC Residual Security report its daily portion of the taxable income or net loss of the REMIC Trust will continue until there are no Securities of any class outstanding, even though the Holder of the REMIC Residual Security may have received full payment of the stated interest and principal on its REMIC Residual Security. The Trustee will provide to Holders of REMIC Residual Securities of each series of Securities (i) such information as is necessary to enable them to prepare their federal income tax returns and (ii) any reports regarding the Securities of such series that may be required under the Code. Taxable Income or Net Loss of a REMIC Trust. The taxable income or net loss of a REMIC Trust will be the income from the qualified mortgages it holds and any reinvestment earnings less deductions allowed to the REMIC Trust. Such taxable income or net loss for a given calendar quarter will be determined in the same manner as for an individual having the calendar year as the taxable year and using the accrual method of accounting, with certain modifications. The first modification is that a deduction will be allowed for accruals of interest (including any original issue discount, but without regard to the investment interest limitation in section 163(d) of the Code) on the REMIC Regular Securities (but not the REMIC Residual Securities), even though REMIC Regular Securities are for non-tax purposes evidences of beneficial ownership rather than indebtedness of a REMIC Trust. Second, market discount or premium equal to the difference between the total stated principal balances of the qualified mortgages and the basis to the REMIC Trust therein generally will be included in income (in the case of discount) or deductible (in the case of premium) by the REMIC Trust as it accrues under a constant yield method, taking into account the 'Prepayment Assumption' (as defined in the Related Prospectus Supplement, see '--Discount and Premium--Original Issue Discount,' below). The basis to a REMIC Trust in the qualified mortgages is the aggregate of the issue prices of all the REMIC Regular Securities and REMIC Residual Securities in the REMIC Trust on the Settlement Date. If, however, a substantial amount of a class of REMIC Regular Securities or REMIC Residual Securities has not been sold to the public, then the fair market value of all the REMIC Regular Securities or REMIC Residual Securities in that class as of the date of the Prospectus Supplement should be substituted for the issue price. Third, no item of income, gain, loss or deduction allocable to a prohibited transaction (see '--Taxes on a REMIC Trust--Prohibited Transactions' below) will be taken into account. Fourth, a REMIC Trust generally 75 may not deduct any item that would not be allowed in calculating the taxable income of a partnership by virtue of section 703(a)(2) of the Code. Finally, the limitation on miscellaneous itemized deductions imposed on individuals by section 67 of the Code will not be applied at the REMIC Trust level to any servicing and guaranty fees. (See, however, '--Pass-Through of Servicing and Guaranty Fees to Individuals' below.) In addition, under the REMIC Regulations, any expenses that are incurred in connection with the formation of a REMIC Trust and the issuance of the REMIC Regular Securities and REMIC Residual Securities are not treated as expenses of the REMIC Trust for which a deduction is allowed. If the deductions allowed to a REMIC Trust exceed its gross income for a calendar quarter, such excess will be a net loss for the REMIC Trust for that calendar quarter. The REMIC Regulations also provide that any gain or loss to a REMIC Trust from the disposition of any asset, including a qualified mortgage or 'permitted investment' (as defined in section 860G(a)(5) of the Code) will be treated as ordinary gain or loss. A Holder of a REMIC Residual Security may be required to recognize taxable income without being entitled to receive a corresponding amount of cash. This could occur, for example, if the qualified mortgages are considered to be purchased by the REMIC Trust at a discount, some or all of the REMIC Regular Securities are issued at a discount, and the discount included as a result of a prepayment on a Mortgage Loan that is used to pay principal on the REMIC Regular Securities exceeds the REMIC Trust's deduction for unaccrued original issue discount relating to such REMIC Regular Securities. Taxable income may also be greater in earlier years because interest expense deductions, expressed as a percentage of the outstanding principal amount of the REMIC Regular Securities, may increase over time as the earlier classes of REMIC Regular Securities are paid, whereas interest income with respect to any given Mortgage Loan expressed as a percentage of the outstanding principal amount of that Mortgage Loan, will remain constant over time. Basis Rules and Distributions. A Holder of a REMIC Residual Security has an initial basis in its Security equal to the amount paid for such REMIC Residual Security. Such basis is increased by amounts included in the income of the Holder and decreased by distributions and by any net loss taken into account with respect to such REMIC Residual Security. A distribution on a REMIC Residual Security to a Holder is not included in gross income to the extent it does not exceed such Holder's basis in the REMIC Residual Security (adjusted as described above) and, to the extent it exceeds the adjusted basis of the REMIC Residual Security, shall be treated as gain from the sale of the REMIC Residual Security. A Holder of a REMIC Residual Security is not allowed to take into account any net loss for any calendar quarter to the extent such net loss exceeds such Holder's adjusted basis in its REMIC Residual Security as of the close of such calendar quarter (determined without regard to such net loss). Any loss disallowed by reason of this limitation may be carried forward indefinitely to future calendar quarters and, subject to the same limitation, may be used only to offset income from the REMIC Residual Security. Excess Inclusions. Any excess inclusions with respect to a REMIC Residual Security are subject to certain special tax rules. With respect to a Holder of a REMIC Residual Security, the excess inclusion for any calendar quarter is defined as the excess (if any) of the daily portions of taxable income over the sum of the 'daily accruals' for each day during such quarter that such REMIC Residual Security was held by such Holder. The daily accruals are determined by allocating to each day during a calendar quarter its ratable portion of the product of the 'adjusted issue price' of the REMIC Residual Security at the beginning of the calendar quarter and 120% of the 'federal long-term rate' in effect on the Settlement Date, based on quarterly compounding, and properly adjusted for the length of such quarter. For this purpose, the adjusted issue price of a REMIC Residual Security as of the beginning of any calendar quarter is equal to the issue price of the REMIC Residual Security, increased by the amount of daily accruals for all prior quarters and decreased by any distributions made with respect to such REMIC Residual Security before the beginning of such quarter. The issue price of a REMIC Residual Security is the initial offering price to the public (excluding bond houses and brokers) at which a substantial number of the REMIC Residual Securities was sold. The federal long-term rate is a blend of current yields on Treasury securities having a maturity of more than nine years, computed and published monthly by the IRS. For Holders of REMIC Residual Securities that are thrift institutions described in section 593 of the Code, income from a REMIC Residual Security generally may be offset by losses from other activities. Under the REMIC Regulations, such an organization is treated as having applied its allowable deductions for the year first to offset income that is not an excess inclusion and then to offset that portion of its income that is an excess 76 inclusion. For other Holders of REMIC Residual Securities, any excess inclusions cannot be offset by losses from other activities. For Holders that are subject to tax only on unrelated business taxable income (as defined in section 511 of the Code), an excess inclusion of such Holder is treated as unrelated business taxable income. With respect to variable contracts (within the meaning of section 817 of the Code), a life insurance company cannot adjust its reserve to the extent of any excess inclusion, except as provided in regulations. The REMIC Regulations indicate that if a Holder of a REMIC Residual Security is a member of an affiliated group filing a consolidated income tax return, the taxable income of the affiliated group cannot be less than the sum of the excess inclusions attributable to all residual interests in REMICS held by members of the affiliated group. For a discussion of the effect of excess inclusions on certain foreign investors that own REMIC Residual Securities, see '--Foreign Investors' below. The REMIC Regulations provide that an organization to which section 593 of the Code applies and which is the Holder of a REMIC Residual Security may not use its allowable deductions to offset any excess inclusions with respect to such Security if such Security does not have 'significant value.' For this purpose, a REMIC Residual Security has significant value under the REMIC Regulations if (i) its issue price is at least 2% of the aggregate of the issue prices of all the REMIC Regular Securities and REMIC Residual Securities in that REMIC Trust and (ii) its 'anticipated weighted average life' is at least 20% of the 'anticipated weighted average life' of such REMIC Trust. In determining whether a REMIC Residual Security has significant value, the anticipated weighted average life of such Security is based in part on the Prepayment Assumption, except that all anticipated payments on such Security are taken into account, regardless of their designation as principal or interest. The anticipated weighted average life of a REMIC Trust is the weighted average of the anticipated weighted average lives of the Securities. The Treasury Department also has the authority to issue regulations that would treat all taxable income of a REMIC Trust as excess inclusions if the REMIC Residual Security does not have 'significant value.' Although the Treasury Department did not exercise this authority in the REMIC Regulations, future regulations may contain such a rule. If such a rule were adopted, it is unclear whether the test for significant value that is contained in the REMIC Regulations and discussed in the two preceding paragraphs would be applicable. If no such rule is applicable, excess inclusions should be calculated as discussed above. In the case of any REMIC Residual Securities that are held by a real estate investment trust, the aggregate excess inclusions with respect to such REMIC Residual Securities reduced (but not below zero) by the real estate investment trust taxable income (within the meaning of section 857(b)(2) of the Code, excluding any net capital gain) will be allocated among the shareholders of such trust in proportion to the dividends received by such shareholders from such trust, and any amount so allocated will be treated as an excess inclusion with respect to a REMIC Residual Security as if held directly by such shareholder. Similar rules will apply in the case of regulated investment companies, common trust funds and certain cooperatives that hold a REMIC Residual Security. Pass-Through of Servicing and Guaranty Fees to Individuals. A Holder of a REMIC Residual Security who is an individual will be required to include in income a share of any servicing and guaranty fees. A deduction for such fees will be allowed to such Holder only to the extent that such fees, along with certain of such Holder's other miscellaneous itemized deductions exceed 2% of such Holder's adjusted gross income. In addition, a Holder of a REMIC Residual Security may not be able to deduct any portion of such fees in computing such Holder's alternative minimum tax liability. A Holder's share of such fees will generally be determined by (i) allocating the amount of such expenses for each calendar quarter on a pro rata basis to each day in the calendar quarter, and (ii) allocating the daily amount among the Holders in proportion to their respective holdings on such day. Taxes on a REMIC Trust Prohibited Transactions. The Code imposes a tax on a REMIC equal to 100% of the net income derived from 'prohibited transactions.' In general, a prohibited transaction means the disposition of a qualified mortgage other than pursuant to certain specified exceptions, the receipt of investment income from a source other than a Mortgage Loan or certain other permitted investments, the receipt of compensation for services, or the disposition of an asset purchased with the payments on the qualified mortgages for temporary investment pending distribution on the regular and residual interests. 77 Contributions to a REMIC after the Startup Day. The Code imposes a tax on a REMIC equal to 100% of the value of any property contributed to the REMIC after the 'startup day' (generally the same as the Settlement Date). Exceptions are provided for cash contributions to a REMIC (i) during the three month period beginning on the startup day, (ii) made to a qualified reserve fund by a Holder of a residual interest, (iii) in the nature of a guarantee, (iv) made to facilitate a qualified liquidation or clean-up call, and (v) as otherwise permitted by Treasury regulations. Net Income from Foreclosure Property. The Code imposes a tax on a REMIC equal to the highest corporate rate on 'net income from foreclosure property.' The terms 'foreclosure property' (which includes property acquired by deed in lieu of foreclosure) and 'net income from foreclosure property' are defined by reference to the rules applicable to real estate investment trusts. Generally, foreclosure property would be treated as such for a period of two years, with possible extensions. Net income from foreclosure property generally means gain from the sale of foreclosure property that is inventory property and gross income from foreclosure property other than qualifying rents and other qualifying income for a real estate investment trust. Sales of REMIC Securities General. Except as provided below, if a Regular or REMIC Residual Security is sold, the seller will recognize gain or loss equal to the difference between the amount realized in the sale and its adjusted basis in the Security. The adjusted basis of a REMIC Regular Security generally will equal the cost of such Security to the seller, increased by any original issue discount or market discount included in the seller's gross income with respect to such Security and reduced by distributions on such Security previously received by the seller of amounts included in the stated redemption price at maturity and by any premium that has reduced the seller's interest income with respect to such Security. See '--Discount and Premium.' The adjusted basis of a REMIC Residual Security is determined as described above under '--Taxation of Holders of REMIC Residual Securities--Basis Rules and Distributions.' Except as provided in the following paragraph or under section 582(c) of the Code, any such gain or loss will be capital gain or loss, provided such Security is held as a 'capital asset' (generally, property held for investment) within the meaning of section 1221 of the Code. Gain from the sale of a REMIC Regular Security that might otherwise be capital gain will be treated as ordinary income to the extent that such gain does not exceed the excess, if any, of (i) the amount that would have been includible in the income of the Holder of a REMIC Regular Security had income accrued at a rate equal to 110% of the 'applicable federal rate' (generally, an average of current yields on Treasury securities) as of the date of purchase over (ii) the amount actually includible in such Holder's income. In addition, gain recognized on such a sale by a Holder of a REMIC Regular Security who purchased such a Security at a market discount would also be taxable as ordinary income in an amount not exceeding the portion of such discount that accrued during the period such Security was held by such Holder, reduced by any market discount includible in income under the rules described below under '--Discount and Premium.' If a Holder of a REMIC Residual Security sells its REMIC Residual Security at a loss, the loss will not be recognized if, within six months before or after the sale of the REMIC Residual Security, such Holder purchases another residual interest in any REMIC or any interest in a taxable mortgage pool (as defined in section 7701(i) of the Code) comparable to a residual interest in a REMIC. Such disallowed loss would be allowed upon the sale of the other residual interest (or comparable interest) if the rule referred to in the preceding sentence does not apply to that sale. While this rule may be modified by Treasury regulations, no such regulations have yet been published. Transfers of REMIC Residual Securities. Section 860E(e) of the Code imposes a substantial tax, payable by the transferor (or, if a transfer is through a broker, nominee, or other middleman as the transferee's agent, payable by that agent) upon any transfer of a REMIC Residual Security to a disqualified organization and upon a pass-through entity (including regulated investment companies, real estate investment trusts, common trust funds, partnerships, trusts, estates, certain cooperatives, and nominees) that owns a REMIC Residual Security if such pass-through entity has a disqualified organization as a record-holder. For purposes of the preceding sentence, a transfer includes any transfer of record or beneficial ownership, whether pursuant to a purchase, a default under a secured lending agreement or otherwise. 78 The term 'disqualified organization' includes the United States, any state or political subdivision thereof, any foreign government, any international organization, or any agency or instrumentality of the foregoing (other than certain taxable instrumentalities), any cooperative organization furnishing electric energy or providing telephone service to persons in rural areas, or any organization (other than a farmers' cooperative) that is exempt from federal income tax, unless such organization is subject to the tax on unrelated business income. Moreover, an entity will not qualify as a REMIC unless there are reasonable arrangements designed to ensure that (i) residual interests in such entity are not held by disqualified organizations and (ii) information necessary for the application of the tax described herein will be made available. Restrictions on the transfer of a REMIC Residual Security and certain other provisions that are intended to meet this requirement are described in the Pooling and Servicing Agreement, and will be discussed more fully in the related Prospectus Supplement relating to the offering of any REMIC Residual Security. In addition, a pass-through entity (including a nominee) that holds a REMIC Residual Security may be subject to additional taxes if a disqualified organization is a record-holder therein. A transferor of a REMIC Residual Security (or an agent of a transferee of a REMIC Residual Security, as the case may be) will be relieved of such tax liability if (i) the transferee furnishes to the transferor (or the transferee's agent) an affidavit that the transferee is not a disqualified organization, and (ii) the transferor (or the transferee's agent) does not have actual knowledge that the affidavit is false at the time of the transfer. Similarly, no such tax will be imposed on a pass-through entity for a period with respect to an interest therein owned by a disqualified organization if (i) the record-holder of such interest furnishes to the pass-through entity an affidavit that it is not a disqualified organization, and (ii) during such period, the pass-through entity has no actual knowledge that the affidavit is false. Under the REMIC Regulations, a transfer of a 'noneconomic residual interest' to a U.S. Person (as defined below in '--Foreign Investors--Grantor Trust Securities and REMIC Regular Securities') will be disregarded for all federal tax purposes unless no significant purpose of the transfer is to impede the assessment or collection of tax. A REMIC Residual Security would be treated as constituting a noneconomic residual interest unless, at the time of the transfer, (i) the present value of the expected future distributions on the REMIC Residual Security is no less than the product of the present value of the 'anticipated excess inclusions' with respect to such Security and the highest corporate rate of tax for the year in which the transfer occurs, and (ii) the transferor reasonably expects that the transferee will receive distributions from the applicable REMIC Trust in an amount sufficient to satisfy the liability for income tax on any 'excess inclusions' at or after the time when such liability accrues. Anticipated excess inclusions are the excess inclusions that are anticipated to be allocated to each calendar quarter (or portion thereof) following the transfer of a REMIC Residual Security, determined as of the date such Security is transferred and based on events that have occurred as of that date and on the Prepayment Assumption. See '--Discount and Premium' and '--Taxation of Holders of REMIC Residual Securities--Excess Inclusions.' The REMIC Regulations provide that a significant purpose to impede the assessment or collection of tax exists if, at the time of the transfer, a transferor of a REMIC Residual Security has 'improper knowledge' (i.e., either knew, or should have known, that the transferee would be unwilling or unable to pay taxes due on its share of the taxable income of the REMIC Trust). A transferor is presumed not to have improper knowledge if (i) the transferor conducts, at the time of a transfer, a reasonable investigation of the financial condition of the transferee and, as a result of the investigation, the transferor finds that the transferee has historically paid its debts as they come due and finds no significant evidence to indicate that the transferee will not continue to pay its debts as they come due in the future; and (ii) the transferee makes certain representations to the transferor in the affidavit relating to disqualified organizations discussed above. Transferors of a REMIC Residual Security should consu lt with their own tax advisors for further information regarding such transfers. Reporting and Other Administrative Matters. For purposes of the administrative provisions of the Code, each REMIC Trust will be treated as a partnership and the Holders of REMIC Residual Securities will be treated as partners. The Trustee will prepare, sign and file federal income tax returns for each REMIC Trust, which returns are subject to audit by the IRS. Moreover, within a reasonable time after the end of each calendar year, the Trustee will furnish to each Holder that received a distribution during such year a statement setting forth the portions of any such distributions that constitute interest distributions, original issue discount, and such other information as is required by Treasury regulations and, with respect to Holders of REMIC Residual Securities in a REMIC Trust, information necessary to compute the daily portions of the taxable income (or net loss) of such 79 REMIC Trust for each day during such year. The Trustee will also act as the tax matters partner for each REMIC Trust, either in its capacity as a Holder of a REMIC Residual Security or in a fiduciary capacity. Each Holder of a REMIC Residual Security, by the acceptance of its REMIC Residual Security, agrees that the Trustee will act as its fiduciary in the performance of any duties required of it in the event that it is the tax matters partner. Each Holder of a REMIC Residual Security is required to treat items on its return consistently with the treatment on the return of the REMIC Trust, unless the Holder either files a statement identifying the inconsistency or establishes that the inconsistency resulted from incorrect information received from the REMIC Trust. The IRS may assert a deficiency resulting from a failure to comply with the consistency requirement without instituting an administrative proceeding at the REMIC Trust level. Unless otherwise specified in the related Prospectus Supplement, the Trustee does not intend to register any REMIC Trust as a tax shelter pursuant to section 6111 of the Code. Termination In general, no special tax consequences will apply to a Holder of a REMIC Regular Security upon the termination of a REMIC Trust by virtue of the final payment or liquidation of the last Mortgage Loan remaining in the Trust Estate. If a Holder of a REMIC Residual Security's adjusted basis in its REMIC Residual Security at the time such termination occurs exceeds the amount of cash distributed to such Holder in liquidation of its interest, although the matter is not entirely free from doubt, it would appear that the Holder of the REMIC Residual Security is entitled to a loss equal to the amount of such excess. DEBT SECURITIES General With respect to each series of Debt Securities, Dewey Ballantine, special tax counsel to the Sponsor, will deliver its opinion to the Sponsor that (unless otherwise limited in the related Prospectus Supplement) the Securities will be classified as debt of the Sponsor secured by the related Mortgage Loans. Consequently, the Debt Securities will not be treated as ownership interests in the Mortgage Loans or the Trust. Holders will be required to report income received with respect to the Debt Securities in accordance with their normal method of accounting. For additional tax consequences relating to Debt Securities purchased at a discount or with premium, see '--Discount and Premium,' below. Special Tax Attributes As described above, Grantor Trust Securities will possess certain special tax attributes by virtue of their being ownership interests in the underlying Mortgage Loans. Similarly, REMIC Securities will possess similar attributes by virtue of the REMIC provisions of the Code. In general, Debt Securities will not possess such special tax attributes. Investors to whom such attributes are important should consult their own tax advisors regarding investment in Debt Securities. Sale or Exchange If a Holder of a Debt Security sells or exchanges such Security, the Holder will recognize gain or loss equal to the difference, if any, between the amount received and the Holder's adjusted basis in the Security. The adjusted basis in the Security generally will equal its initial cost, increased by any original issue discount or market discount previously included in the seller's gross income with respect to the Security and reduced by the payments previously received on the Security, other than payments of qualified stated interest, and by any amortized premium. In general (except as described in '--Discount and Premium--Market Discount,' below), except for certain financial institutions subject to section 582(c) of the Code, any gain or loss on the sale or exchange of a Debt Security recognized by an investor who holds the Security as a capital asset (within the meaning of section 1221 of the Code), will be capital gain or loss and will be long-term or short-term depending on whether the Security has been held for more than one year. 80 DISCOUNT AND PREMIUM A Security purchased for an amount other than its outstanding principal amount will be subject to the rules governing original issue discount, market discount or premium. In addition, all Grantor Trust Strip Securities and certain Grantor Trust Fractional Interest Securities will be treated as having original issue discount by virtue of the coupon stripping rules in section 1286 of the Code. In very general terms, (i) original issue discount is treated as a form of interest and must be included in a Holder's income as it accrues (regardless of the Holder's regular method of accounting) using a constant yield method; (ii) market discount is treated as ordinary income and must be included in a Holder's income as principal payments are made on the Security (or upon a sale of a Security); and (iii) if a Holder so elects, premium may be amortized over the life of the Security and offset against inclusions of interest income. These tax consequences are discussed in greater detail below. Original Issue Discount In general, a Security will be considered to be issued with original issue discount equal to the excess, if any, of its 'stated redemption price at maturity' over its 'issue price.' The issue price of a Security is the initial offering price to the public (excluding bond houses and brokers) at which a substantial number of the Securities was sold. The issue price also includes any accrued interest attributable to the period between the beginning of the first Remittance Period and the Settlement Date. The stated redemption price at maturity of a Security that has a notional principal amount or receives principal only or that is or may be an Accrual Security is equal to the sum of all distributions to be made under such Security. The stated redemption price at maturity of any other Security is its stated principal amount, plus an amount equal to the excess (if any) of the interest payable on the first Payment Date over the interest that accrues for the period from the Settlement Date to the first Payment Date. Notwithstanding the general definition, original issue discount will be treated as zero if such discount is less than 0.25% of the stated redemption price at maturity multiplied by its weighted average life. The weighted average life of a Security is apparently computed for this purpose as the sum, for all distributions included in the stated redemption price at maturity of the amounts determined by multiplying (i) the number of complete years (rounding down for partial years) from the Settlement Date until the date on which each such distribution is expected to be made under the assumption that the Mortgage Loans prepay at the rate specified in the related Prospectus Supplement (the 'Prepayment Assumption') by (ii) a fraction, the numerator of which is the amount of such distribution and the denominator of which is the Security's stated redemption price at maturity. If original issue discount is treated as zero under this rule, the actual amount of original issue discount must be allocated to the principal distributions on the Security and, when each such distribution is received, gain equal to the discount allocated to such distribution will be recognized. Section 1272(a)(6) of the Code contains special original issue discount rules directly applicable to REMIC Securities and Debt Securities and applicable by analogy to Grantor Trust Securities. Investors in Grantor Trust Securities should be aware that there can be no assurance that the rules described below will be applied to such Securities. Under these rules (described in greater detail below), (i) the amount and rate of accrual of original issue discount on each series of Securities will be based on (x) the Prepayment Assumption, and (y) in the case of a Security calling for a variable rate of interest, an assumption that the value of the index upon which such variable rate is based remains equal to the value of that rate on the Settlement Date, and (ii) adjustments will be made in the amount of discount accruing in each taxable year in which the actual prepayment rate differs from the Prepayment Assumption. Section 1272(a)(6)(B)(iii) of the Code requires that the prepayment assumption used to calculate original issue discount be determined in the manner prescribed in Treasury regulations. To date, no such regulations have been promulgated. The legislative history of this Code provision indicates that the assumed prepayment rate must be the rate used by the parties in pricing the particular transaction. The Sponsor anticipates that the Prepayment Assumption for each series of Securities will be consistent with this standard. The Sponsor makes no representation, however, that the Mortgage Loans for a given series will prepay at the rate reflected in the Prepayment Assumption for that series or at any other rate. Each investor must make its own decision as to the appropriate prepayment assumption to be used in deciding whether or not to purchase any of the Securities. 81 Each Securityholder must include in gross income the sum of the 'daily portions' of original issue discount on its Security for each day during its taxable year on which it held such Security. For this purpose, in the case of an original Holder, the daily portions of original issue discount will be determined as follows. A calculation will first be made of the portion of the original issue discount that accrued during each 'accrual period.' The Trustee will supply, at the time and in the manner required by the IRS, to Securityholders, brokers and middlemen information with respect to the original issue discount accruing on the Securities. Unless otherwise disclosed in the related Prospectus Supplement, the Trustee will report original issue discount based on accrual periods of one month, each beginning on a payment date (or, in the case of the first such period, the Settlement Date) and ending on the day before the next payment date. Under section 1272(a)(6) of the Code, the portion of original issue discount treated as accruing for any accrual period will equal the excess, if any, of (i) the sum of (A) the present values of all the distributions remaining to be made on the Security, if any, as of the end of the accrual period and (B) the distribution made on such Security during the accrual period of amounts included in the stated redemption price at maturity, over (ii) the adjusted issue price of such Security at the beginning of the accrual period. The present value of the remaining distributions referred to in the preceding sentence will be calculated based on (i) the yield to maturity of the Security, calculated as of the Settlement Date, giving effect to the Prepayment Assumption, (ii) events (including actual prepayments) that have occurred prior to the end of the accrual period, (iii) the Prepayment Assumption, and (iv) in the case of a Security calling for a variable rate of interest, an assumption that the value of the index upon which such variable rate is based remains the same as its value on the Settlement Date over the entire life of such Security. The adjusted issue price of a Security at any time will equal the issue price of such Security, increased by the aggregate amount of previously accrued original issue discount with respect to such Security, and reduced by the amount of any distributions made on such Security as of that time of amounts included in the stated redemption price at maturity. The original issue discount accruing during any accrual period will then be allocated ratably to each day during the period to determine the daily portion of original issue discount. In the case of Grantor Trust Strip Securities and certain REMIC Securities, the calculation described in the preceding paragraph may produce a negative amount of original issue discount for one or more accrual periods. No definitive guidance has been issued regarding the treatment of such negative amounts. The legislative history to section 1272(a)(6) indicates that such negative amounts may be used to offset subsequent positive accruals but may not offset prior accruals and may not be allowed as a deduction item in a taxable year in which negative accruals exceed positive accruals. Holders of such Securities should consult their own tax advisors concerning the treatment of such negative accruals. A subsequent purchaser of a Security that purchases such Security at a cost less than its remaining stated redemption price at maturity also will be required to include in gross income for each day on which it holds such Security, the daily portion of original issue discount with respect to such Security (but reduced, if the cost of such Security to such purchaser exceeds its adjusted issue price, by an amount equal to the product of (i) such daily portion and (ii) a constant fraction, the numerator of which is such excess and the denominator of which is the sum of the daily portions of original issue discount on such Security for all days on or after the day of purchase). Market Discount A Holder that purchases a Security at a market discount, that is, at a purchase price less than the remaining stated redemption price at maturity of such Security (or, in the case of a Security with original issue discount, its adjusted issue price), will be required to allocate each principal distribution first to accrued market discount on the Security, and recognize ordinary income to the extent such distribution does not exceed the aggregate amount of accrued market discount on such Security not previously included in income. With respect to Securities that have unaccrued original issue discount, such market discount must be included in income in addition to any original issue discount. A Holder that incurs or continues indebtedness to acquire a Security at a market discount may also be required to defer the deduction of all or a portion of the interest on such indebtedness until the corresponding amount of market discount is included in income. In general terms, market discount on a Security may be treated as accruing either (i) under a constant yield method or (ii) in proportion to remaining accruals of original issue discount, if any, or if none, in proportion to remaining distributions of interest on the Security, in 82 any case taking into account the Prepayment Assumption. The Trustee will make available, as required by the IRS, to Holders of Securities information necessary to compute the accrual of market discount. Notwithstanding the above rules, market discount on a Security will be considered to be zero if such discount is less than 0.25% of the remaining stated redemption price at maturity of such Security multiplied by its weighted average remaining life. Weighted average remaining life presumably would be calculated in a manner similar to weighted average life, taking into account payments (including prepayments) prior to the date of acquisition of the Security by the subsequent purchaser. If market discount on a Security is treated as zero under this rule, the actual amount of market discount must be allocated to the remaining principal distributions on the Security and, when each such distribution is received, gain equal to the discount allocated to such distribution will be recognized. Securities Purchased at a Premium A purchaser of a Security that purchases such Security at a cost greater than its remaining stated redemption price at maturity will be considered to have purchased such Security (a 'Premium Security') at a premium. Such a purchaser need not include in income any remaining original issue discount and may elect, under section 171(c)(2) of the Code, to treat such premium as 'amortizable bond premium.' If a Holder makes such an election, the amount of any interest payment that must be included in such Holder's income for each period ending on a Payment Date will be reduced by the portion of the premium allocable to such period based on the Premium Security's yield to maturity. The legislative history of the Tax Reform Act of 1986 states that such premium amortization should be made under principles analogous to those governing the accrual of market discount (as discussed above under '--Market Discount'). If such election is made by the Holder, the election will also apply to all bonds the interest on which is not excludible from gross income ('fully taxable bonds') held by the Holder at the beginning of the first taxable year to which the election applies and to all such fully taxable bonds thereafter acquired by it, and is irrevocable without the consent of the IRS. If such an election is not made, (i) such a Holder must include the full amount of each interest payment in income as it accrues, and (ii) the premium must be allocated to the principal distributions on the Premium Security and, when each such distribution is received, a loss equal to the premium allocated to such distribution will be recognized. Any tax benefit from the premium not previously recognized will be taken into account in computing gain or loss upon the sale or disposition of the Premium Security. Some Securities may provide for only nominal distributions of principal in comparison to the distributions of interest thereon. It is possible that the IRS or the Treasury Department may issue guidance excluding such Securities from the rules generally applicable to debt instruments issued at a premium. In particular, it is possible that such a Security will be treated as having original issue discount equal to the excess of the total payments to be received thereon over its issue price. In such event, section 1272(a)(6) of the Code would govern the accrual of such original issue discount, but a Holder would recognize substantially the same income in any given period as would be recognized if an election were made under section 171(c)(2) of the Code. Unless and until the Treasury Department or the IRS publishes specific guidance relating to the tax treatment of such Securities, the Trustee intends to furnish tax information to Holders of such Securities in accordance with the rules described in the preceding paragraph. Special Election For any Security acquired on or after April 4, 1994, a Holder may elect to include in gross income all 'interest' that accrues on the Security by using a constant yield method. For purposes of the election, the term 'interest' includes stated interest, acquisition discount, original issue discount, de minimis original issue discount, market discount, de minimis market discount and unstated interest as adjusted by any amortizable bond premium or acquisition premium. A Holder should consult its own tax advisor regarding the time and manner of making and the scope of the election and the implementation of the constant yield method. BACKUP WITHHOLDING Distributions of interest and principal, as well as distributions of proceeds from the sale of Securities, may be subject to the 'backup withholding tax' under section 3406 of the Code at a rate of 31% if recipients of such distributions fail to furnish to the payor certain information, including their taxpayer identification numbers, or 83 otherwise fail to establish an exemption from such tax. Any amounts deducted and withheld from a distribution to a recipient would be allowed as a credit against such recipient's federal income tax. Furthermore, certain penalties may be imposed by the IRS on a recipient of distributions that is required to supply information but that does not do so in the proper manner. FOREIGN INVESTORS Grantor Trust Securities and REMIC Regular Securities Distributions made on a Grantor Trust Security or a REMIC Regular Security to, or on behalf of, a Holder that is not a U.S. Person generally will be exempt from U.S. federal income and withholding taxes. The term 'U.S. Person' means a citizen or resident of the United States, a corporation, partnership or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or an estate or trust that is subject to U.S. federal income tax regardless of the source of its income. This exemption is applicable provided (a) the Holder is not subject to U.S. tax as a result of a connection to the United States other than ownership of the Security, (b) the Holder signs a statement under penalties of perjury that certifies that such Holder is not a U.S. Person, and provides the name and address of such Holder, and (c) the last U.S. Person in the chain of payment to the Holder receives such statement from such Holder or a financial institution holding on its behalf and does not have actual knowledge that such statement is false. Holders should be aware that the IRS might take the position that this exemption does not apply to a Holder that also owns 10% or more of the REMIC Residual Securities of any REMIC trust, or to a Holder that is a 'controlled foreign corporation' described in section 881(c)(3)(C) of the Code. REMIC Residual Securities Amounts distributed to a Holder of a REMIC Residual Security that is a not a U.S. Person generally will be treated as interest for purposes of applying the 30% (or lower treaty rate) withholding tax on income that is not effectively connected with a U.S. trade or business. Temporary Treasury Regulations clarify that amounts not constituting excess inclusions that are distributed on a REMIC Residual Security to a Holder that is not a U.S. Person generally will be exempt from U.S. federal income and withholding tax, subject to the same conditions applicable to distributions on Grantor Trust Securities and REMIC Regular Securities, as described above, but only to the extent that the obligations directly underlying the REMIC Trust that issued the REMIC Residual Security (e.g., Mortgage Loans or regular interests in another REMIC) were issued after July 18, 1984. In no case will any portion of REMIC income that constitutes an excess inclusion be entitled to any exemption from the withholding tax or a reduced treaty rate for withholding. See '--REMIC Securities--Taxation of Holders of REMIC Residual Securities--Excess Inclusions.' ERISA CONSIDERATIONS The Employee Retirement Income Security Act of 1974, as amended ('ERISA'), imposes certain fiduciary and prohibited transaction restrictions on employee pension and welfare benefit plans subject to ERISA ('ERISA Plans'). Section 4975 of the Code imposes essentially the same prohibited transaction restrictions on tax-qualified retirement plans described in section 401(a) of the Code ('Qualified Retirement Plans') and on Individual Retirement Accounts ('IRAs') described in section 408 of the Code (collectively, 'Tax-Favored Plans'). Certain employee benefit plans, such as governmental plans (as defined in Section 3(32) of ERISA), are not subject to the ERISA requirements discussed herein. Accordingly, assets of such plans may be invested in Securities without regard to the ERISA considerations described below, subject to the provisions of applicable federal and state law. Any such plan that is a Qualified Retirement Plan and exempt from taxation under sections 401(a) and 501(a) of the Code, however, is subject to the prohibited tran saction rules set forth in section 503 of the Code. Section 404 of ERISA imposes general fiduciary requirements, including those of investment prudence and diversification and the requirement that a Plan's investment be made in accordance with the documents governing the Plan. In addition, Section 406 of ERISA and section 4975 of the Code prohibit a broad range of transactions involving assets of ERISA Plans and Tax-Favored Plans (collectively, 'Plans') and persons 84 ('Parties in Interest' under ERISA or 'Disqualified Persons' under the Code) who have certain specified relationships to the Plans, unless a statutory or administrative exemption is available. Certain Parties in Interest (or Disqualified Persons) that participate in a prohibited transaction may be subject to a penalty (or an excise tax) imposed pursuant to Section 502(i) of ERISA or section 4975 of the Code, unless a statutory or administrative exemption is available. PLAN ASSET REGULATIONS A Plan's investment in Securities may cause the Mortgage Loans included in a Mortgage Pool to be deemed Plan assets. The U.S. Department of Labor (the 'DOL') has promulgated regulations (the 'DOL Regulations') concerning whether or not a Plan's assets would be deemed to include an interest in the underlying assets of an entity (such as a Trust Estate), for purposes of applying the general fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and the Code, when a Plan acquires an 'equity interest' (such as a Security) in such entity. Because of the factual nature of certain of the rules set forth in the DOL Regulations, an investing Plan's assets either may be deemed to include an interest in the assets of a Trust Estate or may be deemed merely to include its interest in the Securities. Therefore, Plans should not acquire or hold Securities in reliance upon the availability of any exception under the DOL Regulations. The prohibited transaction provisions of Section 406 of ERISA and section 4975 of the Code may apply to a Trust Estate and cause the Sponsor, the Master Servicer, any Sub-Servicer, the Trustee, the obligor under any Credit Enhancement mechanism or certain affiliates thereof, to be considered or become Parties in Interest or Disqualified Persons with respect to an investing Plan. If so, the acquisition or holding of Securities by or on behalf of the investing Plan could also give rise to a prohibited trans action under ERISA and the Code, unless some statutory or administrative exemption is available. Securities acquired by a Plan would be assets of that Plan. Under the DOL Regulations, the Trust Estate, including the Mortgage Loans and the other assets held in the Trust Estate, may also be deemed to be assets of each Plan that acquires Securities. Special caution should be exercised before the assets of a Plan are used to acquire a Security in such circumstances, especially if, with respect to such assets, the Sponsor, the Master Servicer, any Sub-Servicer, the Trustee, the obligor under any Credit Enhancement mechanism or an affiliate thereof either (i) has investment discretion with respect to the investment of Plan assets; or (ii) has authority or responsibility to give (or regularly gives) investment advice with respect to Plan assets for a fee pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such assets. Any person who has discretionary authority or control respecting the management or disposition of Plan assets, and any person who provides investment advice with respect to such assets for a fee (in the manner described above), is a fiduciary of the investing Plan. If the Mortgage Loans were to constitute Plan assets, then any party exercising management or discretionary control regarding those assets may be deemed to be a Plan 'fiduciary,' and thus subject to the fiduciary requirements of ERISA and the prohibited transaction provisions of ERISA and section 4975 of the Code with respect to the investing Plan. In addition, if the Mortgage Loans were to constitute Plan assets, then the acquisition or holding of Securities by a Plan, as well as the operation of the Trust Estate, may constitute or involve a prohibited transaction under ERISA and the Code. PROHIBITED TRANSACTION CLASS EXEMPTION The DOL has issued an administrative exemption, Prohibited Transaction Class Exemption 83-1 ('PTCE 83-1'), which generally exempts from the prohibited transaction provisions of section 406(a) of ERISA, and from the excise taxes imposed by sections 4975(a) and (b) of the Code by reason of section 4975(c)(1)(A) through (D) of the Code, certain transactions involving residential mortgage pool investment trusts relating to the purchase, sale and holding of securities in the initial issuance of Securities and the servicing and operation of 'mortgage pools' (as defined below). PTCE 83-1 permits, subject to certain general and specific conditions, transactions which might otherwise be prohibited between Plans and Parties in Interest (or Disqualified Persons) with respect to those Plans, related to the origination, maintenance and termination of mortgage pools and the acquisition and holding of certain mortgage pool pass-through Securities representing interests in such mortgage pools by Plans, whether or not the Plan's assets would be deemed to include an ownership interest in the mortgage loans in the mortgage pool. PTCE 83-1 is not available for mortgage pools that include Cooperative Loans and does not provide an exemption for Subordinate Securities. 85 PTCE 83-1 defines the term 'mortgage pool' as 'an investment pool the corpus of which (1) is held in trust; and (2) consists solely of (a) interest bearing obligations secured by either first or second mortgages or deeds of trust on one- to four-family residential property; (b) property which had secured obligations and which has been acquired by foreclosure; and (c) undistributed cash.' The Sponsor expects that each pool of Mortgage Loans (other than pools including Junior Lien Loans which are not in the second lien position, Cooperative Loans or Multi-Family Loans) will be a 'mortgage pool' within the meaning of PTCE 83-1. PTCE 83-1 defines the term 'mortgage pool pass-through certificate' as a 'certificate representing a beneficial undivided fractional interest in a mortgage pool and entitling the holder of such certificate to pass-through payment of principal and interest from the pooled mortgage loans, less any fees retained by the pool sponsor.' The Sponsor has been advised that, for purposes of applying PTCE 83-1, the term 'mortgage pool pass-through certificate' would include (i) Securities representing interests in a Trust Estate consisting of Mortgage Loans issued in a series consisting of only a single class of Securities; and (ii) Senior Securities representing interests in a Trust Estate consisting of Mortgage Loans issued in a series in which there is only one class of Senior Securities; provided that the Securities described in clauses (i) and (ii) evidence the beneficial ownership of a specified portion of both future interest payments and future principal payments with respect to the Mortgage Loans. It is not clear whether all types of Securities that may be offered hereunder would be 'mortgage pass-through certificates' for purposes of applying PTCE 83-1, including, but not limited to, (a) a class of Securities that evidences the beneficial ownership of interest payments only or principal payments only, disproportionate interest and principal payments, or nominal principal or interest payments, such as the Strip Securities; or (b) Securities in a series including classes of Securities which differ as to timing, sequential order, rate or amount of distributions of principal or interest or both, or as to which distributions of principal or interest or both on any class may be made upon the occurrence of specified events, in accordance with a schedule or formula, or on the basis of collections from designated portions of the Mortgage Pool; or (c) Securities evidencing an interest in a Trust Estate as to which two or more REMIC elections have been made; or (d) a series including other types of multiple classes. Accordingly, until further clarification by the DOL, Plans should not acquire or hold Securities representing interests described in this paragraph in reliance upon the availability of PTCE 83-1 without first consulting with their counsel regarding the application of PTCE 83-1 to the proposed acquisition and holding of such Securities. PTCE 83-1 sets forth three general conditions that must be satisfied for any transaction involving the purchase, sale and holding of 'mortgage pool pass-through certificates' and the servicing and operation of the 'mortgage pool' to be eligible for exemption: (1) the pool trustee must not be an affiliate of the pool sponsor; (2) a system of insurance or other protection for the pooled mortgage loans and property securing such loans, and for indemnifying securityholders against reductions in pass-through payments due to property damage or defaults in loan payments in an amount not less than the greater of 1% of the aggregate principal balance of all covered pooled mortgages, or the principal balance of the largest covered mortgage, must be maintained; and (3) the amount of the payment retained by the pool sponsor together with other funds inuring to its benefit must be limited to not more than adequate consideration for forming the mortgage pools plus reasonable compensation for services provided by the pool sponsor to the mortgage pool. PTCE 83-1 also imposes additional specific conditions for certain types of transactions involving an investing Plan and for situations in which the Parties in Interest or Disqualified Persons are fiduciaries. The Prospectus Supplement for a series will set forth whether the Trustee in respect of that series is affiliated with the Sponsor. If the Credit Enhancement mechanism for a series of Securities constitutes a system of insurance or other protection within the meaning of PTCE 83-1 and is maintained in an amount not less than the greater of 1% of the aggregate principal balance of the Mortgage Loans or the principal balance of the largest Mortgage Loan, then the Sponsor has been advised that the second general condition referred to above will be satisfied. The Sponsor will not receive total compensation for forming and providing services to the Mortgage Pools which will be more than adequate consideration. Each Plan fiduciary responsible for making the investment decision whether to acquire or hold Securities must make its own determination as to whether (i) the Securities constitute 'mortgage pool pass through certificates' for purposes of applying PTCE 83-1, (ii) the second and third general conditions will be satisfied, and (iii) the specific conditions, not discussed herein, of PTCE 83-1 have been satisfied. 86 It should be noted that in promulgating PTCE 83-1 and its predecessor, the DOL did not have under its consideration interests in pools of the exact nature described herein. There are other class and individual prohibited transaction exemptions issued by the DOL that could apply to a Plan's acquisition or holding of Securities. There can be no assurance that any of those exemptions will apply with respect to any particular Plan that acquires or holds Securities or, even if all of the conditions specified therein were satisfied, that the exemption would apply to all transactions involving the Trust Estate. The related Prospectus Supplement under 'ERISA Considerations' may contain additional information regarding the application of PTCE 83-1, or other prohibited transaction exemptions that may be available, with respect to the series offered thereby. TAX EXEMPT INVESTORS A Plan that is exempt from federal income taxation pursuant to Section 501 of the Code (a 'Tax Exempt Investor') nonetheless will be subject to federal income taxation to the extent that its income is unrelated business taxable income within the meaning of Section 512 of the Code. All 'excess inclusions' of a REMIC allocated to a REMIC Residual Security held by a Tax Exempt Investor will be considered unrelated business taxable income and thus will be subject to federal income tax. See 'Certain Federal Income Tax Consequences--REMIC Securities--Taxation of Holders of REMIC Residual Securities--Excess Inclusions.' CONSULTATION WITH COUNSEL Any Plan fiduciary that proposes to cause a Plan to acquire or hold Securities should consult with its counsel with respect to the potential applicability of the fiduciary responsibility provisions of ERISA and the prohibited transaction provisions of ERISA and the Code to the proposed investment and the availability of PTCE 83-1 or any other prohibited transaction exemption. LEGAL INVESTMENT MATTERS Certain classes of Securities offered hereby and by the related Prospectus Supplement will constitute 'mortgage related securities' for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA') so long as they are rated in at least the second highest rating category by any Rating Agency, and as such may be legal investments for persons, trusts, corporations, partnerships, associations, business trusts and business entities (including depository institutions, life insurance companies and pension funds) created pursuant to or existing under the laws of the United States or of any State whose authorized investments are subject to state regulation to the same extent that, under applicable law, obligations issued by or guaranteed as to principal and interest by the United States or any agency or instrumentality thereof constitute legal investments for such entities. Under SMMEA, if a State enacted legislation on or prior to October 3, 1991 specifically limiting the legal investment authority of any such entities with respect to 'mortgage related securities,' such securities will constitute legal investments for entities subject to such legislation only to the extent provided therein. Certain States have enacted legislation which overrides the preemption provisions of SMMEA. SMMEA provides, however, that in no event will the enactment of any such legislation affect the validity of any contractual commitment to purchase, hold or invest in 'mortgage related securities,' or require the sale or other disposition of such securities, so long as such contractual commitment was made or such securities acquired prior to the enactment of such legislation. SMMEA also amended the legal investment authority of federally-chartered depository institutions as follows: federal savings and loan associations and federal savings banks may invest in, sell or otherwise deal with 'mortgage related securities' without limitation as to the percentage of their assets represented thereby, federal credit unions may invest in such securities, and national banks may purchase such securities for their own account without regard to the limitations generally applicable to investment securities set forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable federal regulatory authority may prescribe. The Federal Financial Institutions Examination Council has adopted a supervisory policy statement (the 'Policy Statement'), applicable to all depository institutions, setting forth guidelines for and significant restrictions on investments in 'high-risk mortgage securities.' The Policy Statement has been adopted by the Federal Reserve Board, the Office of the Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with an effective date of February 10, 1992. The Policy Statement generally indicates that a 87 mortgage derivative product will be deemed to be high risk if it exhibits greater price volatility than a standard fixed rate thirty-year mortgage security. According to the Policy Statement, prior to purchase, a depository institution will be required to determine whether a mortgage derivative product that it is considering acquiring is high-risk, and if so, that the proposed acquisition would reduce the institution's overall interest rate risk. Reliance on analysis and documentation obtained from a securities dealer or other outside party without internal analysis by the institution would be unacceptable. There can be no assurance as to which classes of Securities will be treated as high-risk under the Policy Statement. In addition, the National Credit Union Administration has issued regulations governing federal credit union investments which prohibit investment in certain specified types of securities, which may include certain classes of Securities. Similar policy statements have been issued by regulators having jurisdiction over other types of depository institutions. There may be other restrictions on the ability of certain investors either to purchase certain classes of Securities or to purchase any class of Securities representing more than a specified percentage of the investors' assets. The Sponsor will make no representations as to the proper characterization of any class of Securities for legal investment or other purposes, or as to the ability of particular investors to purchase any class of Securities under applicable legal investment restrictions. These uncertainties may adversely affect the liquidity of any class of Securities. Accordingly, all investors whose investment activities are subject to legal investment laws and regulations, regulatory capital requirements or review by regulatory authorities should consult with their own legal advisors in determining whether and to what extent the Securities of any class constitute legal investments under SMMEA or are subject to investment, capital or other restrictions, and whether SMMEA has been overridden in any jurisdiction applicable to such investor. USE OF PROCEEDS Unless otherwise specified in the related Prospectus Supplement, substantially all of the net proceeds to be received from the sale of Securities will be applied by the Sponsor to finance the purchase of, or to repay short- term loans incurred to finance the purchase of, the Mortgage Loans underlying the Securities or will be used by the Sponsor for general corporate purposes. The Sponsor expects that it will make additional sales of securities similar to the Securities from time to time, but the timing and amount of any such additional offerings will be dependent upon a number of factors, including the volume of mortgage loans purchased by the Sponsor, prevailing interest rates, availability of funds and general market conditions. METHODS OF DISTRIBUTION The Securities offered hereby and by the related Prospectus Supplements will be offered in series through one or more of the methods described below. The Prospectus Supplement prepared for each series will describe the method of offering being utilized for that series and will state the public offering or purchase price of such series and the net proceeds to the Sponsor from such sale. The Sponsor intends that Securities will be offered through the following methods from time to time and that offerings may be made concurrently through more than one of these methods or that an offering of a particular series of Securities may be made through a combination of two or more of these methods. Such methods are as follows: 1. By negotiated firm commitment or best efforts underwriting and public re-offering by underwriters; 2. By placements by the Sponsor with institutional investors through dealers; and 3. By direct placements by the Sponsor with institutional investors. In addition, if specified in the related Prospectus Supplement, a series of Securities may be offered in whole or in part in exchange for the Mortgage Loans (and other assets, if applicable) that would comprise the Mortgage Pool in respect of such Securities. If underwriters are used in a sale of any Securities (other than in connection with an underwriting on a best efforts basis), such Securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at fixed public offering prices or at 88 varying prices to be determined at the time of sale or at the time of commitment therefor. Such underwriters may be broker-dealers affiliated with the Sponsor whose identities and relationships to the Sponsor will be as set forth in the related Prospectus Supplement. The managing underwriter or underwriters with respect to the offer and sale of a particular series of Securities will be set forth on the cover of the Prospectus Supplement relating to such series and the members of the underwriting syndicate, if any, will be named in such Prospectus Supplement. In connection with the sale of the Securities, underwriters may receive compensation from the Sponsor or from purchasers of the Securities in the form of discounts, concessions or commissions. Underwriters and dealers participating in the distribution of the Securities may be deemed to be underwriters in connection with such Securities, and any discounts or commissions received by them from the Sponsor and any profit on the resale of Securities by them may be deemed to be underwriting discounts and commissions under the Securities Act of 1933, as amended. The Prospectus Supplement will describe any such compensation paid by the Sponsor. It is anticipated that the underwriting agreement pertaining to the sale of any series of Securities will provide that the obligations of the underwriters will be subject to certain conditions precedent, that the underwriters will be obligated to purchase all such Securities if any are purchased (other than in connection with an underwriting on a best efforts basis) and that, in limited circumstances, the Sponsor will indemnify the several underwriters and the underwriters will indemnify the Sponsor against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended, or will contribute to payments required to be made in respect thereof. The Prospectus Supplement with respect to any series offered by placements through dealers will contain information regarding the nature of such offering and any agreements to be entered into between the Sponsor and purchasers of Securities of such series. The Sponsor anticipates that the Securities offered hereby will be sold primarily to institutional investors. Purchasers of Securities, including dealers, may, depending on the facts and circumstances of such purchases, be deemed to be 'underwriters' within the meaning of the Securities Act of 1933, as amended, in connection with reoffers and sales by them of Securities. Holders of Securities should consult with their legal advisors in this regard prior to any such reoffer or sale. LEGAL MATTERS Certain legal matters will be passed upon for the Sponsor by Dewey Ballantine, New York, New York and by the office of the general counsel of the Sponsor. FINANCIAL INFORMATION The Sponsor has determined that its financial statements are not material to the offering made hereby. However, any prospective purchaser who desires to review financial information concerning the Sponsor will be provided by the Sponsor upon request with a copy of the most recent financial statements of the Sponsor. A Prospectus Supplement may contain the financial statements of the related Credit Enhancer, if any. ADDITIONAL INFORMATION This Prospectus, together with the Prospectus Supplement for each series of Securities, contains a summary of the material terms of the applicable exhibits to the Registration Statement and the documents referred to herein and therein. Copies of such exhibits are on file at the offices of the Securities and Exchange Commission in Washington, D.C., and may be obtained at rates prescribed by the Commission upon request to the Commission and may be inspected, without charge, at the Commission's offices. 89 --------------------------------------------------------- --------------------------------------------------------- No dealer, salesperson or other person has been authorized to give any information or to make any representations not contained in this Prospectus Supplement and the Prospectus and, if given or made, such information or representations must not be relied upon as having been authorized by the Sponsor or by the Underwriter. This Prospectus Supplement and the Prospectus do not constitute an offer to sell, or a solicitation of an offer to buy, the securities offered hereby to anyone in any jurisdiction in which the person making such offer or solicitation is not qualified to do so to anyone to whom it is unlawful to make any such offer or solicitation. Neither the delivery of this Prospectus Supplement nor any sale made hereunder shall, under any circumstances, create an implication that information herein or therein is correct as of any time since the date of this Prospectus Supplement or the Prospectus. ---------------------- TABLE OF CONTENTS
Page Prospectus Supplement Available Information.................................................................................................. S- Reports to the Certificateholders...................................................................................... S- Summary................................................................................................................ S- Risk Factors............................................................................................................ S- The Portfolio of Mortgage Loans......................................................................................... S- The Mortgage Loan Pool...................................................................................................S- Prepayment and Yield Considerations..................................................................................... S- Use of Proceeds......................................................................................................... S- The Sponsor and the Master Servicer..................................................................................... S- Description of the Certificates......................................................................................... S- The Certificate Insurance Policy........................................................................................ S- The Certificate Insurer................................................................................................. S- The Pooling and Servicing Agreement..................................................................................... S- Certain Federal Income Tax Consequences................................................................................. S- ERISA Considerations.....................................................................................................S- Ratings................................................................................................................. S- Legal Investment Considerations......................................................................................... S- Underwriting............................................................................................................ S- Experts................................................................................................................. S- Certain Legal Matters................................................................................................... S- Index of Principal Defined Terms........................................................................................ S- Global Clearance, Settlement and Tax Documentation Procedures......................................................................................... Annex I Appendix A - Audited Financial Statements of Certificate Insurer................................................................................................... S- Appendix B - Unaudited Financial Statements of Certificate Insurer................................................................................................... S- Prospectus Summary of Prospectus.....................................................................................................4 Special Considerations...................................................................................................13 The Trusts...............................................................................................................18 The Mortgage Pools.......................................................................................................25 Mortgage Loan Program....................................................................................................27 Description of the Securities............................................................................................35 Subordination............................................................................................................49 Description of Credit Enhancement........................................................................................50 Hazard Insurance; Claims Thereunder......................................................................................55 The Sponsor and the Transferor...........................................................................................55 The Master Servicer......................................................................................................56 The Pooling and Servicing Agreement......................................................................................56 Yield Considerations.....................................................................................................62 Maturity and Prepayment Considerations...................................................................................63 Certain Legal Aspects of Mortgage Loans and Related Matters................................................................................................................65 Certain Federal Income Tax Consequences..................................................................................72 ERISA Considerations.....................................................................................................84 Legal Investment Matters.................................................................................................87 Use of Proceeds..........................................................................................................88 Methods of Distribution..................................................................................................88 Financial Information....................................................................................................89 Index of Principal Definitions...........................................................................................90
--------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- Advanta Mortgage Loan Trust 1996-4 $210,000,000 Class A-1 Group I Certificates $120,000,000 class A-2 Group II Certificates Mortgage Loan Asset-Backed Certificates Series 1996-4 ------------------- PROSPECTUS SUPPLEMENT ------------------- PRUDENTIAL SECURITIES INCORPORATED MORGAN STANLEY & CO. Incorporated SALOMON BROTHERS INC December 6, 1996 --------------------------------------------------------- --------------------------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----